
[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62846-62848]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24681]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70688; File No. SR-NSCC-2013-02]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing Amendment No. 3 to a Proposed Rule 
Change, as Previously Modified by Amendment Nos. 1 and 2, To Institute 
Supplemental Liquidity Deposits to Its Clearing Fund Designed To 
Increase Liquidity Resources To Meet Its Liquidity Needs

October 15, 2013.
    On March 21, 2013, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2013-02 (``Proposed Rule 
Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Exchange Act'') \1\ and Rule 19b-4 thereunder.\2\ The 
Proposed Rule Change was published for comment in the Federal Register 
on April 10, 2013.\3\ On April 19, 2013, NSCC filed with the Commission 
Amendment No. 1 to the Proposed Rule Change, which the Commission 
published for comment in the Federal Register on May 29, 2013 and 
designated a longer period for Commission action on the Proposed Rule 
Change, as amended.\4\ On June 11, 2013, NSCC filed with the Commission 
Amendment No. 2 to the Proposed Rule Change, as previously modified by 
Amendment No. 1, which the Commission published for comment in the 
Federal Register on July 15, 2013, with an order instituting 
proceedings to determine whether to approve or disapprove the Proposed 
Rule Change (``Order Instituting Proceedings'').\5\ On September 25, 
2013, the Commission designated a longer period of review for 
Commission action on the Order Instituting Proceedings.\6\ As of 
October 15, 2013, the Commission had received 22 comment letters on the 
proposal contained in the Proposed Rule Change and its related Advance 
Notice,\7\ including NSCC's two responses to the comment letters 
received as of August 20, 2013.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4. NSCC also filed the proposal contained in 
the Proposed Rule Change as advance notice SR-NSCC-2013-802 
(``Advance Notice''), as modified by Amendment No. 1, pursuant to 
Section 806(e)(1) of the Payment, Clearing, and Settlement 
Supervision Act of 2010 and Rule 19b-4(n)(1)(i) thereunder. See 
Release No. 34-69451 (Apr. 25, 2013), 78 FR 25496 (May 1, 2013). On 
May 20, 2013, the Commission extended the period of review of the 
Advance Notice, as modified by Amendment No. 1. Release No. 34-69605 
(May 20, 2013), 78 FR 31616 (May 24, 2013). On June 11, 2013, NSCC 
filed Amendment No. 2 to the Advance Notice, as previously modified 
by Amendment No. 1. Release No. 34-69954 (Jul. 9, 2013), 78 FR 42127 
(Jul. 15, 2013). On October 4, 2013, NSCC filed Amendment No. 3 to 
the Advance Notice, as previously modified by Amendment Nos. 1 and 
2. Release No. 34-70689 (Oct. 15, 2013). The proposal in the 
Proposed Rule Change, as amended, and the Advance Notice, as 
amended, shall not take effect until all regulatory actions required 
with respect to the proposal are completed.
    \3\ Release No. 34-69313 (Apr. 4, 2013), 78 FR 21487 (Apr. 10, 
2013).
    \4\ Release No. 34-69620 (May 22, 2013), 78 FR 32292 (May 29, 
2013).
    \5\ Release No. 34-69951 (Jul. 9, 2013), 78 FR 42140 (Jul. 15, 
2013).
    \6\ Release No. 34-70501 (Sep. 25, 2013), 78 FR 60347 (Oct. 1, 
2013).
    \7\ See Comments Received on File Nos. SR-NSCC-2013-02 (http://sec.gov/comments/sr-nscc-2013-02/nscc201302.shtml) and SR-NSCC-2013-
802 (http://sec.gov/comments/sr-nscc-2013-802/nscc2013802.shtml). 
Since the proposal contained in the Proposed Rule Change was also 
filed as an Advance Notice, see Release No. 34-69451, supra note 2, 
the Commission is considering all public comments received on the 
proposal regardless of whether the comments are submitted to the 
Proposed Rule Change, as amended, or the Advance Notice, as amended.
    \8\ NSCC also received a comment letter directly prior to filing 
the Proposed Rule Change and related Advance Notice with the 
Commission, which NSCC provided to the Commission in Amendment No. 1 
to the filings. See Exhibit 2 to File No. SR-NSCC-2013-02 (http://sec.gov/rules/sro/nscc/2013/34-69620-ex2.pdf).
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    Pursuant to Section 19(b)(1) of the Exchange Act \9\ and Rule 19b-4 
thereunder,\10\ notice is hereby given that on October 7, 2013, NSCC 
filed with the Commission Amendment No. 3 to the Proposed Rule Change, 
as previously modified by Amendment Nos. 1 and 2, 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, as modified by Amendment No. 3, from interested 
persons.\11\
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    \9\ 15 U.S.C. 78s(b)(1).
    \10\ 17 CFR 240.19b-4.
    \11\ Defined terms that are not defined in this notice are 
defined in Amended Exhibit 5 to the Proposed Rule Change, available 
at http://sec.gov/rules/sro/nscc.shtml, under File No. SR-NSCC-2013-
02, Additional Materials.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The Proposed Rule Change, as modified by Amendments No. 1, No. 2, 
and No. 3, is a proposal by NSCC to amend its Rules & Procedures (the 
``NSCC Rules'') to provide for supplemental liquidity deposits to its 
Clearing Fund (the ``NSCC Clearing Fund'') to ensure that NSCC has 
adequate liquidity resources to meet its liquidity needs (the ``SLD 
Proposal'' or sometimes the ``Proposal''), as described below. NSCC 
filed Amendment No. 3 (this ``Amendment'') to the Proposed Rule Change, 
as previously modified by Amendment No. 1 and No. 2, in order to delete 
the provisions in the proposed Rule relating to Regular Activity 
Liquidity Obligations (as defined), to respond to concerns raised by 
Members. As a result the Proposal, as revised, would impose 
supplemental liquidity obligations on affected Members only with 
respect to activity relating to monthly options expiry periods (defined 
in the proposed Rule as ``Special Activity Liquidity Obligations'').

II. Clearing Agency'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, as 
modified by Amendment No. 3, 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 such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Description of Change
Existing Proposal
    As noted in the original proposal contained in the Proposed Rule 
Change, as modified by Amendments No. 1 and No. 2 (the ``Rule 
Filing''), the SLD Proposal would modify the NSCC Rules to add a new 
Rule 4(A), to establish a supplemental liquidity funding obligation 
designed to cover the liquidity exposure attributable to those Members 
and families of affiliated Members (``Affiliated Families'') that 
regularly incur the largest gross settlement debits over a settlement 
cycle during both times of normal trading activity (``Regular Activity 
Periods'') and times of increased trading and settlement activity that 
arise around monthly options expiration dates (``Options Expiration 
Activity Periods'').
    Under the existing Proposal, the Liquidity Obligation of a Member 
or Affiliated Family with respect to a

[[Page 62847]]

Regular Activity Period (a ``Regular Activity Liquidity Obligation'') 
or an Options Expiration Activity Period (a ``Special Activity 
Liquidity Obligation'') would be imposed on the 30 Members or 
Affiliated Families who generate the largest aggregate liquidity needs 
over a settlement cycle that would apply in the event of a closeout 
(that is, over a period from date of default through the following 
three settlement days), based upon an historical look-back period. The 
calculations for both the Regular Activity Liquidity Obligation and the 
Special Activity Liquidity Obligation were designed so that NSCC has 
adequate liquidity resources to enable it to settle transactions, 
notwithstanding the default of one of these 30 largest Members or 
Affiliated Families during Regular Activity Periods, as well as during 
Options Expiration Activity Periods. The liquidity obligations imposed 
on Members of Affiliated Families would be apportioned among the 
Members in that Affiliated Family in proportion to the liquidity risk 
(or peak exposure) they present to NSCC. The Regular Activity Liquidity 
Obligation of an Unaffiliated Member or Affiliated Family that has a 
Regular Activity Liquidity Obligation (a Regular Activity Liquidity 
Provider) is satisfied by such Regular Activity Liquidity Provider 
making a Regular Activity Supplemental Deposit to the Clearing Fund in 
the amount of its Regular Activity Liquidity Obligation, offset by (i) 
the total amount (if any) of its commitment and the commitment of its 
``Designated Lender'' under NSCC's committed line of credit (the 
``Credit Facility'') and (ii) a share of the unallocated commitments of 
other lenders under the Credit Facility.
    The cash deposit in respect of a Special Activity Liquidity 
Obligation (a ``Special Activity Supplemental Deposit'') is structured 
in the existing SLD Proposal to address any additional liquidity 
shortfalls (over and above NSCC's other available liquidity resources) 
that arise during the heightened activity period around monthly options 
expiration. As such, these additional Special Activity Supplemental 
Deposits would be required to be maintained on deposit with NSCC only 
through the completion of the related settlement cycle and for a few 
days thereafter.
Objections From Commenters
    The key concerns raised by commenters with respect to the existing 
SLD Proposal were as follows:
    First, commenters claimed that Members were not sufficiently 
consulted or involved during the development of the Proposal (even 
though NSCC management conducted significant Member outreach), so that 
the Proposal lacked input that could have potentially resulted in a 
less burdensome approach.
    Second, commenters claimed that the Proposal was anticompetitive or 
discriminatory because the obligation to provide supplemental liquidity 
was imposed on only the 30 largest Unaffiliated Members or Affiliated 
Families (even though those Members collectively represent 
approximately 85% of NSCC's total membership by peak liquidity needs), 
rather than all Members of NSCC. This concern was raised in the context 
of Regular Activity Supplemental Deposits.
    Third, commenters claimed that the existing Proposal was 
anticompetitive or discriminatory because, with respect to Regular 
Activity Supplemental Deposits, it gave a dollar for dollar credit for 
commitments made by Regular Activity Liquidity Providers or their 
Designated Lenders under the Credit Facility--supposedly favoring 
Regular Activity Liquidity Providers with affiliated banks.
    NSCC believes that the proposed amendments and items described 
below address or mitigate all of these concerns.
Proposed Amendments
    NSCC is proposing to amend the existing SLD Proposal by removing 
those provisions that, collectively, deal with the imposition of 
Regular Activity Liquidity Obligations, while maintaining the 
provisions relating to Special Activity Liquidity Obligations. The 
proposed Rule, as so revised, would thus impose only Special Activity 
Liquidity Obligations with respect to the heightened activity of 
Options Expiration Activity Periods (that is, the four days beginning 
with the Friday that precedes the monthly expiration date for stock 
options, and ending on the third settlement day following). Under the 
revised Proposal, as under the existing Proposal as it relates to 
Special Activity Liquidity Obligations, only those Unaffiliated Members 
or Affiliated Families among the top 30 whose activity during monthly 
Options Expiration Activity Periods generate liquidity needs in excess 
of NSCC's then available liquidity resources will be obligated to fund 
such additional amounts. That is, the allocation formula ratably 
applies the additional amount needed during the relevant Options 
Expiration Activity Period based upon the affected Member's Special 
Activity Peak Liquidity Exposure. To the extent that a Member's Special 
Activity Peak Liquidity Exposure is less than or equal to NSCC's then 
available liquidity resources, its share of the Special Activity Peak 
Liquidity Need will be zero.
    In addition, under the revised SLD Proposal, as under the existing 
Proposal as it relates to Special Activity Liquidity Obligations, 
Unaffiliated Members and Affiliated Families, will be able to manage 
their exposures by making Special Activities Prefund Deposits where 
they project their own activity will increase their liquidity exposure. 
For example, if a Special Activity Liquidity Provider anticipates that 
its Special Activity Peak Liquidity Exposure at any time during a 
particular Options Expiration Activity Period will be greater than the 
amount calculated by NSCC, it can make an additional cash deposit to 
the Clearing Fund (in excess of its Required Deposit) that it 
designates as a ``Special Activity Prefund Deposit.'' However, to the 
extent that a Member fails to adequately prefund its activity, it may 
be subject to a Special Activity Liquidity Call in the same manner as 
provided in the existing Proposal.
    With these changes, NSCC is removing those provisions of the 
existing SLD Proposal that generated most concern from commenters, 
while retaining those provisions that enable NSCC to collect additional 
liquidity resources to cover the heightened liquidity needs that arise 
during monthly Options Expiration Activity Periods. Every Unaffiliated 
Member and Affiliated Family among the top 30 whose activity causes a 
liquidity need in excess of NSCC's available liquidity resources will 
contribute ratably to such shortfall, so the Proposal fairly and 
equitably apportions the obligation among those Unaffiliated Members 
and Affiliated Families whose activity cause the need. The removal of 
those provisions relating to how commitments under the Credit Facility 
would be credited against the cash deposit obligations of Regular 
Activity Liquidity Providers render concerns about such allocation 
moot.
    As indicated in NSCC's August 20, 2013 letter to the Commission, 
DTCC is separately establishing a standing member-based advisory group, 
the Clearing Agency Liquidity Council (``CALC''), as a forum for the 
discussion of liquidity and liquidity-related financing needs and 
trends. The CALC will initially focus on liquidity initiatives 
currently being considered by NSCC to address liquidity funding during 
periods of normal activity, including issues raised by commenters on 
the existing SLD Proposal. In response to commenters' more general 
concerns regarding NSCC's reliance on

[[Page 62848]]

the Credit Facility and related refinancing risk, NSCC will review with 
the CALC the financing options available to NSCC to supplement the 
Clearing Fund as a liquidity resource, and the related costs of those 
options. Any new initiatives proposed as a result of the CALC review 
that require regulatory approval will be addressed in a separate 
filing.
    Reporting. As noted in the previous amendment to the Rule Filing, 
NSCC agrees that Members have to be able to plan for their liquidity 
obligations. At the same time, NSCC also believes it is critical that 
Members understand the risks that their own activity presents to NSCC, 
and be prepared to monitor their activity and alter their behavior if 
they want to minimize the liquidity risk they present to NSCC. 
Accordingly, NSCC will make available to each Member a daily report 
showing the amount of liquidity NSCC would need in the event of the 
default of such Member. Separately, NSCC will provide, and continue to 
discuss with Special Activity Liquidity Providers, the reports 
regarding their Special Activity Liquidity Obligations as currently 
provided in the proposed Rule.
    Finally, the amendment makes certain technical corrections and 
clarifies the time period for when Special Activity Liquidity Calls 
must be satisfied.
    Implementation Timeframe. The SLD Proposal will be implemented on 
February 1, 2014. As a result, the first time that Members will be 
obligated to fund any Special Activity Supplemental Deposits will be 
for the Options Expiration Activity Period in February 2014. NSCC Risk 
staff will provide to affected Members their Special Activity Peak 
Liquidity Exposures for the relevant Special Activity Lookback Period 
by no later than January 15, 2014.
2. Statutory Basis
    The revised SLD Proposal contributes to NSCC's goal of ensuring 
that NSCC has adequate liquidity resources to meet its settlement 
obligations notwithstanding the default of an Unaffiliated Member or 
Affiliated Family that poses the largest aggregate liquidity exposure 
over the relevant settlement cycle, by providing a mechanism for 
satisfying the peak liquidity needs that occur during monthly Options 
Expiration Activity Periods. As such, the Proposal is consistent with 
the requirements of the Exchange Act, and the rules and regulations 
thereunder applicable to NSCC, as well as with PFMI Principle 7 as 
described in the Rule Filing.

(B) Comments on Competition

    NSCC believes that the revised SLD Proposal will not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The Special Activity 
Liquidity Obligations imposed on Special Activity Liquidity Providers 
will ensure that all Unaffiliated Members and Affiliated Families whose 
activity present liquidity exposure to NSCC during periods of 
heightened activity during Options Expiration Activity Periods fairly 
and equitably contribute to NSCC's liquidity resources for settlement. 
NSCC believes the changes that have been made to the existing Proposal 
fully address the concerns raised by commenters, and eliminate any 
impact that the SLD Proposal might have on competition. To the extent 
there remains any perceived burden on competition caused by the 
Proposal, NSCC believes that such burden is not unreasonable or 
inappropriate to prevent systemic risk given that the Proposal 
contributes to the goal of financial stability in the event of Member 
default.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments on the Proposed Rule Change, including NSCC's 
formal response to the written comments, have been filed with the 
Commission and are available on the Commission's Web site.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the Proposed Rule 
Change, as modified by Amendment No. 3, is consistent with the Section 
17A \12\ or any other provision of the Exchange Act, or the rules and 
regulations thereunder. Comments may be submitted by any of the 
following methods:
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    \12\ 15 U.S.C. 78q-1.
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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 No. SR-NSCC-2013-02 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 No. SR-NSCC-2013-02. 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, as 
amended, that are filed with the Commission, and all written 
communications relating to the Proposed Rule Change, as amended, 
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 Room, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings also will be available for inspection 
and copying at the principal office of NSCC and on NSCC's Web site at 
http://dtcc.com/legal/rule_filings/nscc/2013.php.
    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 No. SR-NSCC-2013-02 and 
should be submitted on or before November 5, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24681 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P


