
[Federal Register Volume 77, Number 35 (Wednesday, February 22, 2012)]
[Notices]
[Pages 10589-10591]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-4004]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66398; File No. SR-NSCC-2012-02]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Enhance Its 
Margining Methodology as Applied to Municipal and Corporate Bonds

February 15, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 10590]]

(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on February 1, 2012, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared primarily by NSCC. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change 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. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to enhance NSCC's 
margining methodology as it applies to municipal and corporate bonds.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

Proposal Overview
    A primary objective of NSCC's Clearing Fund is to have on deposit 
from each applicable member assets sufficient to satisfy losses that 
may otherwise be incurred by NSCC as the result of the default of the 
member and the resultant close out of that member's unsettled positions 
under NSCC's trade guaranty. Each member's clearing fund (``Clearing 
Fund'') required deposit is calculated daily pursuant to a formula set 
forth in Procedure XV of the Rules, which formula is designed to 
provide sufficient funds to cover this risk of loss. The Clearing Fund 
formula accounts for a variety of risk factors through the application 
of a number of components, each described in Procedure XV.\4\
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    \4\ In addition to those described in this filing, Clearing Fund 
components also include (i) a mark-to-market component which, with 
certain exclusions, takes into account any difference between the 
contract price and market price for net positions of each security 
in a member's portfolio through settlement; (ii) the Market Maker 
Domination component, or ``MMDOM'', is charged to Market Makers, or 
firms that clear for them; (iii) a ``special charge'' in view of 
price fluctuations in or volatility or lack of liquidity of any 
security; (iv) an additional charge (between 5-10%) of a member's 
outstanding fail positions; (v) a ``specified activity charge'' for 
transactions scheduled to settle on a shortened settlement cycle 
(i.e., less than T+3 or T+3 for ``as-of'' transactions); (vi) an 
additional charge which NSCC may require of members on surveillance 
status; and (vii) an ``Excess Capital Premium'' which takes into 
account the degree to which a member's collateral requirement 
compares to the member's excess net capital by applying a charge if 
a member's Required Deposit, minus amounts applied from the charges 
described in (ii) and (iii) above, is above its required capital.
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    The volatility component or ``VaR'' is a core component of this 
formula and is designed to calculate the amount of money that may be 
lost on a portfolio over a given period of time and that is assumed 
would be necessary to liquidate the portfolio within a given level of 
confidence. Pursuant to Procedure XV, NSCC may exclude from this 
calculation net unsettled positions in classes of securities whose 
volatility is not amendable to generally accepted statistical analysis 
in a complex manner, such as illiquid municipal or corporate bonds. The 
volatility charge for such positions is determined by multiplying the 
absolute value of the positions by a predetermined percentage 
(``haircut''), which shall not be less than 2%.
    In connection with its ongoing review of the adequacy and 
appropriateness of its margining methodologies, NSCC is proposing to 
amend Procedure XV of the Rules so that NSCC will apply this haircut-
based margining methodology, at a rate no less than 2%, as is currently 
permitted by Procedure XV to all municipal and corporate bonds 
processed through NSCC. The proposed rule change will make clear that 
to the extent NSCC deems appropriate NSCC may apply this haircut to any 
of the municipal and corporate bonds that it processes. As NSCC 
continuously reviews its margin models in order to ensure the 
reliability of its margining methodology in achieving the desired 
coverage, the proposed rule change will allow it to apply a margin 
requirement to these instruments that it deems appropriate.
    NSCC reviews its risk management processes against applicable 
regulatory and industry standards, including, but not limited to: (i) 
The Recommendations for Central Counterparties (``Recommendations'') of 
the Committee on Payment and Settlement Systems and the Technical 
Committee of the International Organization of Securities Commissions 
(``IOSCO'') and (ii) the securities laws and rulemaking promulgated by 
the Commission. In conformance to Recommendations 3 and 4 of the IOSCO 
Recommendations and with the Commission rules proposed under the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010, 
specifically proposed Rule 17Ad-22(b)(1) addressing measurement and 
management of credit exposures, this proposed rule change will assist 
NSCC in its continuous efforts to ensure the reliability of its 
margining methodology and will limit NSCC's exposures and losses by 
allowing it to apply a margin requirement to corporate and municipal 
bonds cleared at NSCC that captures the risk characteristics of these 
instruments, including historical price volatility and market liquidity 
and idiosyncratic risk, which are asset class specific.
Implementation Timeframe
    Pending Commission approval of this proposed rule change, members 
will be advised of the implementation date through issuance of an NSCC 
Important Notice.
Proposed Rule Changes
    In order make clear that, to the extent NSCC deems appropriate, a 
haircut-based margining methodology may be applied to all municipal and 
corporate bonds processed at NSCC, NSCC proposes to amend Sections 
I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of Procedure XV, as marked on Exhibit 
5 attached to the proposed rule filing by removing the qualifier 
``illiquid'' before ``municipal or corporate bonds.'' No other changes 
to the Rules are contemplated by this proposed rule change.
    As a central counterparty, NSCC occupies an important role in the 
securities settlement system by interposing itself between 
counterparties to financial transactions, thereby reducing the risk 
faced by participants and contributing to global financial stability. 
The effectiveness of a central counterparty's risk controls and the 
adequacy of its financial resources are critical to achieving these 
risk-reducing goals. The proposed rule change will assist NSCC in its 
continuous efforts to ensure the reliability of its margining 
methodology and will limit NSCC's exposures and losses by allowing it 
to apply a margin requirement to corporate and municipal bonds cleared 
at NSCC that captures the risk characteristics of these instruments. 
NSCC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the rules and 
regulations thereunder applicable to

[[Page 10591]]

NSCC, specifically with proposed Rule 17Ad-22(b)(1) that addresses 
measurement and management of credit exposures, as well as with the 
IOSCO Recommendations 3 and 4. The proposed rule change is not 
inconsistent with the existing rules of NSCC, including any other rules 
proposed to be amended.
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    \5\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC believes that the proposed rule change will not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change will 
allow NSCC to apply a margin requirement to corporate and municipal 
bonds cleared at NSCC that captures the risk characteristics of these 
instruments. Therefore, the proposed rule change will help NSCC to 
limit its exposures and losses to these instruments and as such will 
contribute to the goal of financial stability in the event of member 
default and will render not unreasonable or inappropriate any burden on 
competition that the changes could be regarded as imposing.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. NSCC will notify the Commission of any written 
comments received by NSCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(A) By order approve or disapprove the proposed rule change or (B) 
institute proceedings to determine whether the proposed rule change 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
    Send an email to rule-comments@sec.gov. Please include File Number 
SR-NSCC-2012-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2012-02. 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 Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filings will also be available for 
inspection and copying at the principal office of NSCC and on NSCC's 
Web site at http://www.dtcc.com/downloads/legal/rule_filings/2012/nscc/2012-02.pdf.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NSCC-2012-02 
and should be submitted on or before March 14, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-4004 Filed 2-21-12; 8:45 am]
BILLING CODE 8011-01-P


