
[Federal Register Volume 78, Number 238 (Wednesday, December 11, 2013)]
[Notices]
[Pages 75413-75420]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29497]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70999; File No. SR-NSCC-2013-02]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change, as Modified by 
Amendment Nos. 1, 2, and 3, To Institute Supplemental Liquidity 
Deposits to Its Clearing Fund Designed To Increase Liquidity Resources 
To Meet Its Liquidity Needs

December 5, 2013.

I. Introduction

    On March 21, 2013, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ proposed rule change SR-NSCC-2013-02 (``Proposed Rule 
Change'') to institute supplemental liquidity deposits to NSCC's 
Clearing Fund designed to increase liquidity resources to meet NSCC's 
liquidity needs (``SLD Proposal'').\3\ On April 10, 2013, the 
Commission published notice of the Proposed Rule Change for comment in 
the Federal Register.\4\ On April 19, 2013, NSCC filed with the 
Commission Amendment No. 1 to the Proposed Rule Change,\5\ 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.\6\ The Commission received 12 comment 
letters, including the NFS Letter, to the SLD Proposal as initially 
filed and as modified by Amendment No. 1.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NSCC also filed the SLD 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) 78 FR 62893 (Oct. 22, 2013). On December 5, 2013, 
the Commission issued a Notice of No Objection to the Advance 
Notice, as modified by Amendment Nos. 1, 2, and 3, to Institute 
Supplemental Liquidity Deposits to Its Clearing Fund Designed to 
Increase Liquidity Resources to Meet Its Liquidity Needs. Release 
No. 34-71000.
    \4\ Release No. 34-69313 (Apr. 4, 2013), 78 FR 21487 (Apr. 10, 
2013) (``Notice'').
    \5\ NSCC filed Amendment No. 1 to the Proposed Rule Change and 
Advance Notice filings to include as Exhibit 2 a comment letter from 
National Financial Services (``NFS''), a Fidelity Investments 
(``Fidelity'') company, to NSCC, dated March 19, 2013, regarding the 
SLD Proposal prior to NSCC filing the SLD Proposal with the 
Commission (``NFS Letter''). See Release No. 34-69620 (May 22, 
2013), 78 FR 32292 (May 29, 2013) (``Notice of Amendment No. 1'') 
and see Exhibit 2 to File No. SR-NSCC-2013-02 (http://www.sec.gov/rules/sro/nscc/2013/34-69620-ex2.pdf).
    \6\ Notice of Amendment No. 1, 78 FR 32292.
    \7\ See NFS Letter. See letters to Elizabeth M. Murphy, 
Secretary, Commission from: John C. Nagel, Esq., Managing Director 
and General Counsel, Citadel Securities (``Citadel''), dated April 
18, 2013 (``Citadel Letter I'') and June 13, 2013 (``Citadel Letter 
II''); Peter Morgan, Senior Vice President & Deputy General Counsel, 
Charles Schwab & Co., Inc., (``Charles Schwab'') dated April 22, 
2013 (``Charles Schwab Letter I'') and May 1, 2013 (``Charles Schwab 
Letter II''); Thomas Price, Managing Director, Operations, 
Technology & BCP, Securities Industry and Financial Markets 
Association (``SIFMA''), dated April 23, 2013 (``SIFMA Letter I''); 
Julian Rainero, Bracewell & Giuliani LLP, on behalf of Investment 
Technology Group, Inc. (``ITG''), dated April 25, 2013 (``ITG Letter 
I''); Matthew S. Levine, Managing Director, Co-Chief Compliance 
Officer, Knight Capital Americas LLC (``Knight Capital''), dated 
April 25, 2013 (``Knight Capital Letter''); Giovanni Favretti, CFA, 
Managing Director, Deutsche Bank, dated April 25, 2013 (``Deutsche 
Bank Letter''); Scott C. Goebel, Senior Vice President, General 
Counsel, Fidelity, dated April 25, 2013 (``Fidelity Letter I''); and 
Chief Financial Officer & Executive Managing Director, ConvergEx 
Execution Solutions LLC (``ConvergEx''), dated May 2, 2013 
(``ConvergEx Letter I'') and May 22, 2013 (``ConvergEx Letter II'').
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    On June 11, 2013, NSCC filed with the Commission Amendment No. 2 to 
the Proposed Rule Change, as previously modified by Amendment No. 1 
(``Amended SLD Proposal''), 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'').\8\ The Commission 
received nine comment letters to Amendment No. 2 and the Order 
Instituting Proceedings.\9\ On September 25, 2013, the Commission 
designated a longer period of review for Commission action on the Order 
Instituting Proceedings.\10\ On October 7, 2013, NSCC filed Amendment 
No. 3 to the Proposed Rule Change (``Final SLD Proposal''), as 
previously modified by Amendment Nos. 1 and 2, which the Commission 
published for comment on October 15, 2013.\11\ The Commission received 
two comment letters to the Final SLD Proposal (i.e., Amendment No. 
3).\12\
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    \8\ Release No. 34-69951 (Jul. 9, 2013), 78 FR 42140 (Jul. 15, 
2013) (``Notice of Amendment No. 2'').
    \9\ See letters to Elizabeth M. Murphy, Secretary, Commission 
from: Thomas Price, Managing Director, Operations, Technology & BCP, 
SIFMA, dated June 24, 2013 (``SIFMA Letter II'') and August 7, 2013 
(``SIFMA Letter III''); Scott C. Goebel, Senior Vice President, 
General Counsel, Fidelity, dated June 26, 2013 (``Fidelity Letter 
II''); Peter Morgan, Senior Vice President & Deputy General Counsel, 
Charles Schwab, dated August 5, 2013 (``Charles Schwab Letter III'') 
and September 11, 2013 (``Charles Schwab Letter IV''); Paul T. Clark 
and Anthony C.J. Nuland, Seward & Kissel, LLP (representing Charles 
Schwab), dated August 5, 2013 (``Charles Schwab Letter V''); John C. 
Nagel, Esq., Managing Director and General Counsel, Citadel, dated 
August 5, 2013 (``Citadel Letter III'') and September 5, 2013 
(``Citadel Letter IV''); and Mark Solomon, Managing Director and 
Deputy General Counsel, ITG, dated August 5, 2013 (``ITG Letter 
II'').
    \10\ Release No. 34-70501 (Sep. 25, 2013), 78 FR 60347 (Oct. 1, 
2013).
    \11\ Release No. 34-70688 (Oct. 15, 2013), 78 FR 62846 (Oct. 22, 
2013) (``Notice of Amendment No. 3'').
    \12\ See letters to Elizabeth M. Murphy, Secretary, Commission 
from: Managing Director and Deputy General Counsel, ITG, dated 
November 1, 2013 (``ITG Letter III''); and Scott C. Goebel, Senior 
Vice President, General Counsel, Fidelity, dated November 5, 2013 
(``Fidelity Letter III'').

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[[Page 75414]]

    By this order, the Commission approves the Final Proposed Rule 
Change.

II. Background

A. Purpose of the SLD Proposal

    NSCC filed the SLD Proposal to ensure that it would maintain 
sufficient liquid financial resources to withstand, at a minimum, a 
default by its single clearing member or clearing member family 
(``Clearing Member'') to which it has the largest exposure (``Cover 
One''), in compliance with Commission Rule 17Ad-22(b)(3) \13\ and a 
long-standing NSCC policy.
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    \13\ 17 CFR 240.17Ad-22(b)(3).
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B. Development of the SLD Proposal

    As originally filed, the SLD Proposal would have created two 
related funding obligations: (1) for the 30 Clearing Members that 
presented NSCC with the largest peak liquidity requirements on days 
that did not coincide with quarterly options expiration periods 
(``Regular Periods''), a liquidity deposit calculated based on the 
Clearing Member's pro rata portion of NSCC's aggregate liquidity 
requirements from the 30 Clearing Members during Regular Periods 
(``Regular SLD''); and (2) for a subset of the 30 Clearing Members that 
present NSCC with a peak liquidity requirement above NSCC's total 
liquidity resources on days that coincide with quarterly options 
expiration periods (``Special Periods''), a liquidity deposit 
calculated based on each Clearing Members' individual contribution to 
NSCC's liquidity requirement above its liquidity resources during 
Special Periods (``Special SLD'').\14\
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    \14\ See Notice, 78 FR at 21487-88.
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    Regular SLD would have been satisfied in cash only; however, a 
Clearing Member would have received a dollar-for-dollar reduction of 
its Regular SLD funding obligation to the extent that it contributed to 
NSCC's line-of-credit (``Credit Facility'').\15\ Special SLD could only 
be satisfied with cash.\16\
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    \15\ Id. at 21489.
    \16\ Id.
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    On June 11, 2013, in response to comments received, NSCC filed the 
Amended SLD Proposal so that, in summary: (1) Special Periods were 
expanded to include monthly options expirations periods along with 
quarterly options expiration periods; (2) Clearing Members could 
designate a commercial lender to commit to the Credit Facility on the 
Clearing Member's behalf, enabling the Clearing Member to receive the 
dollar-for-dollar reduction of its Regular SLD; (3) any commitments to 
the Credit Facility made in excess of a Clearing Member's Regular SLD 
would be allocated ratably among all 30 Clearing Members that would be 
required to make a Regular SLD funding obligation; and (4) ``liquidity 
exposure reports'' would be provided to all NSCC members, so that 
members, particularly Clearing Members, could better assess their 
liquidity exposure to NSCC.\17\
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    \17\ See Notice of Amendment No. 2, 78 FR at 42127.
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    On October 4 and 7, 2013, in response to further comments received, 
NSCC filed the Final SLD Proposal.\18\ Among other things, the Final 
SLD Proposal eliminated the Regular SLD funding obligation.
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    \18\ NSCC filed the Final Proposed Rule Change on October 7, 
2013, three days after NSCC filed Amendment No. 3 to the Advance 
Notice.
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III. Description of the Final SLD Proposal

    The Final SLD Proposal would add Rule 4A to NSCC's Rules and 
Procedures \19\ to establish a supplemental liquidity funding 
obligation designed to cover the liquidity exposure attributable to 
those Clearing Members that regularly incur the largest gross 
settlement debits over a settlement cycle during times of increased 
trading and settlement activity that arise around Special Periods. More 
specifically, the obligation applies to a subset of the 30 Clearing 
Members that present NSCC with historic peak liquidity needs on days 
that coincide with Special Periods above NSCC's current total liquidity 
resources. For this subset, NSCC will require a liquidity deposit based 
on the proportion of the historic peak liquidity exposure that is 
presented by each Clearing Member in excess of NSCC's then-available 
total liquidity resources. NSCC will hold deposits made in satisfaction 
of a Special SLD funding obligation in its Clearing Fund for a period 
of seven days after the end of the Special Period.
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    \19\ See Exhibit 5 to File No. SR-NSCC-2013-02, http://www.sec.gov/rules/sro/nscc/2013/34-70688-ex5.pdf.
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    Additionally, if a Clearing Member believes its current trading 
activity will present a liquidity need to NSCC above NSCC's total 
liquidity resources, it may voluntarily deposit funds with NSCC to 
cover the shortfall (``Prefund Deposit''). NSCC will hold Prefund 
Deposit funds for a period of seven days after the end of the Special 
Period. If a Clearing Member presents NSCC with a liquidity need above 
total liquidity resources that is not funded by a Special SLD funding 
obligation or a Prefund Deposit the Final SLD Proposal will empower 
NSCC to call from that Clearing Member the amount of the shortfall, or 
that Clearing Member's share if caused by more than one Clearing 
Member, and hold it for 90 days (``Call Deposit'').

IV. Summary of Comments Received and NSCC's Responses

    The Commission received 23 comment letters to the SLD Proposal \20\ 
from eight commenters,\21\ including the NFS Letter.\22\ Commenters 
include bank affiliated and non-bank affiliated NSCC members, as well 
as one industry trade group, SIFMA.\23\ NSCC also submitted two 
responses to comment letters received.\24\ The Commission has reviewed 
and taken into full consideration all of the comments received.
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    \20\ Since the SLD Proposal was filed as both the Proposed Rule 
Change and the Advance Notice, the Commission considered all 
comments received on the proposal, regardless of whether the 
comments were submitted to the Proposed Rule Change or the Advance 
Notice. See NFS Letter, Citadel Letter I, Citadel Letter II, Citadel 
Letter III, Citadel Letter IV, Charles Schwab Letter I, Charles 
Schwab Letter II, Charles Schwab Letter III, Charles Schwab Letter 
IV, Charles Schwab Letter V, SIFMA Letter I, SIFMA Letter II, SIFMA 
Letter III, ITG Letter I, ITG Letter II, ITG Letter III, Knight 
Capital Letter, Deutsche Bank Letter, Fidelity Letter I, Fidelity 
Letter II, Fidelity Letter III, ConvergEx Letter I, and ConvergEx 
Letter II.
    \21\ See Comments to the Proposed Rule Change (File No. SR-NSCC-
2013-02), http://sec.gov/comments/sr-nscc-2013-02/nscc201302.shtml, 
and the Advance Notice (File No. SR-NSCC-2013-802) (http://sec.gov/comments/sr-nscc-2013-802/nscc2013802.shtml (``Comments Received''). 
For purposes of discussion, the Commission considers the comment 
submitted by Seward & Kissel on behalf of Charles Schwab as a 
Charles Schwab comment, see Charles Schwab Letter V, supra note 9, 
and the NFS Letter as a Fidelity comment. See NFS Letter.
    \22\ See NFS Letter.
    \23\ See Comments Received, supra note 21.
    \24\ See letters to Elizabeth M. Murphy, Secretary, Commission 
from Larry E. Thompson, Managing Director and DTCC General Counsel, 
dated June 10, 2013 (``NSCC Letter I'') and August 20, 2013 (``NSCC 
Letter II'').
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    All eight commenters express support for NSCC's overall goal of 
maintaining sufficient financial resources to withstand a default by a 
Clearing Member (i.e., Cover One).\25\ One commenter, who previously 
supported approval of the Amended SLD Proposal, supports approval of 
the Final SLD Proposal.\26\ The remaining seven commenters oppose the 
original SLD Proposal and the Amended SLD Proposal, as discussed in 
more detail below.\27\ One of those seven

[[Page 75415]]

commenters submitted the sole comment letter in opposition to the Final 
SLD Proposal.\28\
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    \25\ See NFS Letter, Citadel Letter III, Charles Schwab Letter 
II, Charles Schwab Letter III, Charles Schwab Letter V, SIFMA Letter 
II, SIFMA Letter III, Knight Capital Letter, Deutsche Bank Letter, 
Fidelity Letter I, Fidelity Letter II, ConvergEx Letter I, ConvergEx 
Letter II, ITG Letter II.
    \26\ See Fidelity Letter II, Fidelity Letter III.
    \27\ See NFS Letter, Citadel Letter I, Citadel Letter II, 
Citadel Letter III, Citadel Letter IV, Charles Schwab Letter I, 
Charles Schwab Letter II, Charles Schwab Letter III, Charles Schwab 
Letter IV, Charles Schwab Letter V, SIFMA Letter I, SIFMA Letter II, 
SIFMA Letter III, ITG Letter I, ITG Letter II, ITG Letter III, 
Knight Capital Letter, Deutsche Bank Letter, Fidelity Letter I, 
ConvergEx Letter I, and ConvergEx Letter II.
    \28\ See ITG Letter III.
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A. Comments Expressing Support for the Provision of Adequate Liquidity 
at NSCC

    As mentioned above, all eight commenters to the SLD Proposal agreed 
that NSCC must have access to sufficient liquidity and capital to meet 
the Cover One standard, and some stated NSCC's critical role as a 
national clearance and settlement system.\29\ For example, one 
commenter states ``that a clearing agency performing central 
counterparty services is essential to the proper functioning of the 
capital markets, and that ensuring the clearing agency is well 
capitalized and financially sound serves to benefit both the clearing 
agency's members and the capital markets as a whole.'' \30\ The 
commenter goes on to state that it ``appreciates the need for the NSCC, 
both as a central counterparty and as a financial market utility that 
has been designated by the Financial Stability Oversight Council as 
systemically important, to maintain sufficient financial resources to 
withstand a default by the NSCC member or family of affiliated members 
to which the NSCC has the largest exposure . . . [and] also understands 
the NSCC's desire to broaden the base of support for its liquidity 
needs beyond the small group of firms that has historically supported 
these needs through participation in the NSCC's revolving credit 
facility, and believes it is important to enable all of the NSCC's 
members to help the NSCC maintain sufficient financial resources.'' 
\31\ Another commenter notes that ``NSCC should have the resources it 
needs to be a source of strength for the national clearing and 
settlement system . . . .'' \32\ Additionally, another commenter states 
that it ``appreciates the importance of NSCC's critical role as a 
[c]entral [c]ounterparty . . . and supports NSCC's goal in ensuring 
that it has access to sufficient capital in the event that is largest 
participant fails.'' \33\
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    \29\ See supra note 25.
    \30\ See SIFMA Letter II.
    \31\ Id.
    \32\ See Charles Schwab Letter III, Charles Schwab Letter V.
    \33\ See ConvergEx Letter II.
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B. Opposing Comments Received Prior to the Final SLD Proposal

1. Comments Inapplicable to the Final SLD Proposal
    The seven commenters opposed to approval of the SLD Proposal 
objected to the SLD Proposal for various reasons, as discussed 
below.\34\ Additionally, five of the seven commenters that oppose the 
SLD Proposal, as well as the commenter in support of the Final SLD 
Proposal, suggested potential alternative mechanisms for NSCC to 
satisfy its liquidity needs.\35\
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    \34\ See Citadel Letter I, Citadel Letter II, Citadel Letter 
III, Citadel Letter IV, Charles Schwab Letter I, Charles Schwab 
Letter II, Charles Schwab Letter III, Charles Schwab Letter IV, 
Charles Schwab Letter V, SIFMA Letter I, SIFMA Letter II, SIFMA 
Letter III, ITG Letter I, ITG Letter II, ITG Letter III, Knight 
Capital Letter, Deutsche Bank Letter, ConvergEx Letter I, and 
ConvergEx Letter II.
    \35\ Alternatives included, but were not limited to: NSCC should 
issue long-term debt to increase its liquidity resources; NSCC 
should increase intra-day margin calls; NSCC should increase 
Clearing Member fees; NSCC should reduce the settlement cycle; NSCC 
should reduce the volume of unsettled trades; NSCC should establish 
a bilateral third-party bank committed facility; and NSCC should 
change its capital structure. See NFS Letter, Citadel Letter II, 
Citadel Letter III, Charles Schwab Letter II, Charles Schwab Letter 
III, SIFMA Letter II, SIFMA Letter III, ITG Letter II, Fidelity 
Letter II, Fidelity Letter III and ConvergEx Letter II. The 
Commission notes that these comments are beyond the subject of the 
Final SLD Proposal by NSCC that is before the Commission for 
approval under Section 19(b) of the Act (which provides that the 
Commission shall approve a proposed rule change if it finds that 
such proposed rule change is consistent with the requirements of 
this title and the applicable rules and regulations issued 
thereunder).
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    Many of the commenters opposed to the original SLD Proposal and 
Amended SLD Proposal raised concerns with a component of the proposal 
that NSCC eliminated in the Final SLD Proposal.\36\ Those comments 
included concerns about: (1) The anticipated costs for Clearing Members 
as a result of implementation of Regular SLD funding obligation, 
including costs imposed by a quick implementation period; \37\ (2) 
Clearing Members' inability to accurately predict or control their 
funding obligation and the effects thereof, including broker-dealers' 
inability to plan for funding and liquidity risks as provided in FINRA 
Reg. Notice 10-57; \38\ (3) distributional effects associated with 
implementation of the Regular SLD funding obligation, manifested in 
particular by an anti-competitive and disparate impact on non-bank 
affiliated Clearing Members compared to bank affiliated Clearing 
Members with regard to the offsetting commitments to the Credit 
Facility; \39\ and (4) perceived mechanical flaws with the application 
of the Regular SLD funding obligation.\40\
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    \36\ See Citadel Letter II, Citadel Letter III, Citadel Letter 
IV, Charles Schwab Letter I, Charles Schwab Letter II, Charles 
Schwab Letter III, Charles Schwab Letter IV, Charles Schwab Letter 
V, SIFMA Letter I, SIFMA Letter II, SIFMA Letter III, ITG Letter I, 
ITG Letter II, Knight Capital Letter, Deutsche Bank Letter, 
ConvergEx Letter I, ConvergEx Letter II.
    \37\ See, e.g., ITG Letter I, ITG Letter II, Citadel Letter III.
    \38\ See Citadel Letter II, Citadel Letter III, Citadel Letter 
IV, Charles Schwab Letter II, SIFMA Letter I, SIFMA Letter II, ITG 
Letter II, Knight Capital Letter, Deutsche Bank Letter, ConvergEx 
Letter II.
    \39\ See Citadel Letter II, Charles Schwab Letter I, Charles 
Schwab Letter II, Charles Schwab Letter III, Charles Schwab Letter 
IV, Charles Schwab Letter V, SIFMA Letter II, SIFMA Letter III, ITG 
Letter I, ITG Letter II, Knight Capital Letter, ConvergEx Letter I, 
ConvergEx Letter II.
    \40\ See ITG Letter II.
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    Since NSCC has eliminated the aspect of the SLD Proposal to which 
these comments were made, the Commission believes these comments are 
not relevant for its determination on the Final SLD Proposal.
2. Comments Applicable to the Final SLD Proposal and NSCC's Responses 
Thereto
    Seven of the eight commenters raised concerns with the SLD Proposal 
that, while not necessarily directly associated with the Special SLD 
funding obligation, could apply to elements of the Special SLD funding 
obligation and thus are relevant for the Commission's consideration of 
the Final SLD Proposal.\41\ Four commenters argued that the SLD 
Proposal is arbitrary and capricious because it applies to no more than 
30 Clearing Members.\42\ Six commenters argued that the SLD Proposal 
would have unintended consequences of forcing a number of Clearing 
Members to terminate their membership and thereby concentrating the 
broker clearing business in fewer Clearing Members, potentially 
increasing systemic risk.\43\ One

[[Page 75416]]

commenter stated that historic peak liquidity needs, which would be 
used by NSCC to determine the liquidity need presented by each Clearing 
Member, is not necessarily predictive of future liquidity needs.\44\ 
Three commenters argued that NSCC incorrectly calculates its liquidity 
needs in the SLD Proposal, either because the liquidity need is 
calculated using Clearing Member gross settlement debits instead of net 
settlement debits or because the settlement debits were aggregated over 
a four-day cycle.\45\ Seven commenters stated that treatment of funds 
delivered to NSCC to satisfy a funding obligation under the SLD 
Proposal for Commission Rule 15c3-1 purposes was unclear.\46\
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    \41\ See Citadel Letter II, Citadel Letter III, Citadel Letter 
IV, Charles Schwab Letter I, Charles Schwab Letter II, Charles 
Schwab Letter III, Charles Schwab Letter IV, Charles Schwab Letter 
V, SIFMA Letter I, SIFMA Letter II, SIFMA Letter III, ITG Letter I, 
ITG Letter II, ITG Letter III, Knight Capital Letter, Deutsche Bank 
Letter, ConvergEx Letter I, ConvergEx Letter II.
    \42\ See Citadel Letter II, ITG Letter I, Charles Schwab Letter 
IV, Charles Schwab Letter V, SIFMA Letter III, ITG Letter II, ITG 
Letter III. All four commenters argue that the imposition of a 
funding obligation to no more than 30 Clearing Members was arbitrary 
and capricious referred to the Regular SLD funding obligation, in 
which a Regular SLD funding obligation is satisfied pro rata by 30 
Clearing Members irrespective of whether each Clearing Member 
presented a peak liquidity need above NSCC total available liquidity 
resources. One of the four commenters claims that the same argument 
persists for the Special SLD Funding Obligation; as such, the 
Commission will consider the comment here. See Charles Schwab Letter 
V.
    \43\ See Citadel Letter II, Charles Schwab Letter II, Charles 
Schwab Letter III, SIFMA Letter I, SIFMA Letter II, SIFMA Letter 
III, ITG Letter I, ITG Letter II, Knight Capital Letter, ConvergEx 
Letter II.
    \44\ See ITG Letter II.
    \45\ See Citadel Letter III, ITG Letter II, ConvergEx Letter I, 
ConvergEx Letter II.
    \46\ See 17 CFR 240.15c3-1. See, e.g., Citadel Letter II, 
Citadel Letter III, Charles Schwab Letter II, Charles Schwab Letter 
III, SIFMA Letter II, ITG Letter I, ITG Letter II, ITG Letter III, 
Knight Capital Letter, ConvergEx Letter II.
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    In response to comments that imposition of a funding obligation is 
arbitrary and capricious, NSCC revised the SLD Proposal to eliminate 
the Regular SLD funding obligation component,\47\ which would have: (i) 
Assigned a funding obligation to the 30 Clearing Members that presented 
NSCC with the largest peak liquidity needs irrespective of whether the 
peak liquidity need itself would have surpassed NSCC available 
liquidity resources, and (ii) allocated a funding obligation to each of 
those 30 Clearing Members driven substantially by the peak liquidity 
need presented to NSCC by the largest Clearing Member.\48\ In response 
to comments regarding unintended consequences of the SLD Proposal, such 
as Clearing Members terminating their membership, NSCC stated that the 
Clearing Member is in the best position to monitor and manage the 
liquidity risks presented by its own activity.\49\ Similarly, NSCC 
states that the maintenance of adequate liquidity resources at NSCC is 
a key element in the reduction of systemic risk at a systemically-
important financial market utility and also a key component of NSCC's 
ability to prevent the failure of a Clearing Member from having a 
cascading effect on other Clearing Members.\50\
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    \47\ See Notice of Amendment No. 3, 78 FR at 62847.
    \48\ Id. at 62846-47.
    \49\ NSCC Letter I.
    \50\ See NSCC Letter I, NSCC Letter II.
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    NSCC agreed that historic peak liquidity needs are not necessarily 
predictive of future liquidity needs, and as a result NSCC has proposed 
a mechanism whereby Clearing Members may voluntarily prefund liquidity 
needs that the Clearing Member anticipates will surpass total liquidity 
resources available at NSCC through the Prefund Deposit.\51\ 
Furthermore, in the event a Clearing Member does not elect to prefund 
potential liquidity needs but does present a liquidity need to NSCC 
above total liquidity resources that is not accounted for by a Special 
SLD funding obligation, NSCC has proposed a mechanism to require the 
Clearing Member to fund the liquidity need through the Call 
Deposit.\52\ With respect to comments that NSCC incorrectly calculates 
its liquidity need by using gross settlement debits instead of net 
settlement debits, NSCC responded that, as a central counterparty for 
its members, its risk-exposure is reflected by the gross settlement 
debits presented to it, not net settlement debits, in the event of a 
Clearing Member default.\53\ Furthermore, NSCC stated that calculating 
liquidity obligations over a four-day settlement cycle is consistent 
with NSCC's practical liquidity obligation in the event of a Clearing 
Member default.\54\ Finally, in response to comments that the treatment 
of funds posted in satisfaction of an SLD funding obligation for Rule 
15c3-1 purposes is unclear, NSCC stated that it structured the SLD 
Proposal so that deposits made pursuant to an SLD funding obligation 
would constitute Clearing Fund deposits, which have clear regulatory 
capital treatment under Rule 15c3-1.\55\
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    \51\ See Notice of Amendment No. 3, 78 FR at 62847.
    \52\ See Notice, 78 FR at 21489.
    \53\ See NSCC Letter I.
    \54\ Id.
    \55\ Id.
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    Six commenters stated that the SLD Proposal did not provide a 
sufficient evaluation of its burden on competition and lacked necessary 
detail so as to elicit meaningful comment.\56\ Many of these commenters 
argued that, while they supported NSCC's need for liquidity resources 
generally, NSCC did not demonstrate a specific need for additional 
liquidity in connection with the SLD Proposal.\57\ Five commenters 
argued the SLD Proposal lacked sufficient Clearing Member input prior 
to submitting the proposal.\58\ Three commenters also argued that the 
SLD Proposal did not adequately protect investors.\59\ One commenter 
argued that the fact that NSCC submitted the SLD Proposal without 
Clearing Member input is indicative of a lack of fair representation 
for Clearing Members in the governance of NSCC.\60\ One commenter 
stated that NSCC did not take into account the potential impact of 
other central counterparties instituting similar liquidity 
provisions.\61\ Five commenters argued in opposition of cash being the 
only source by which a Clearing Member could satisfy a supplemental 
liquidity deposit.\62\
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    \56\ See Citadel Letter II, Charles Schwab Letter I, Charles 
Schwab Letter II, Charles Schwab Letter III, Charles Schwab Letter 
V, SIFMA Letter II, ITG Letter I, ITG Letter II, Knight Capital 
Letter, ConvergEx Letter I, ConvergEx Letter II.
    \57\ See Citadel Letter II, Citadel Letter III, SIFMA Letter II, 
SIFMA Letter III, ITG Letter II, ITG Letter III, ConvergEx Letter 
II.
    \58\ See Citadel Letter III, Charles Schwab Letter I, ITG Letter 
I, ITG Letter II, Knight Capital Letter, Deutsche Bank Letter.
    \59\ See Deutsche Bank Letter, Charles Schwab Letter II, Charles 
Schwab IV, Charles Schwab Letter V, SIFMA Letter II.
    \60\ See Citadel Letter III.
    \61\ See Charles Schwab Letter II, Charles Schwab Letter III. 
Additionally, one commenter argued that NSCC attempted to improperly 
amend the SLD Proposal through a response to comments. See Charles 
Schwab Letter V. The Commission notes that NSCC filed the Final SLD 
Proposal subsequent to the Commission's receipt of this comment in 
accordance with the rule filing process. See Notice of Amendment No. 
3, 78 FR 62846.
    \62\ See NFS Letter, Charles Schwab Letter II, Charles Schwab 
Letter III, Citadel Letter II, Citadel Letter III, SIFMA Letter I, 
Fidelity Letter II, ITG Letter II.
---------------------------------------------------------------------------

    In response to comments received regarding insufficient detail of 
the SLD Proposal, NSCC provided detail regarding: the specific need for 
liquidity resources,\63\ implementation timeframes for the SLD 
Proposal,\64\ and a suite of tools, such as monthly and daily reports, 
to enable Clearing Members to more accurately predict a potential 
Regular SLD funding obligation.\65\ NSCC stated that it would work with 
Clearing Members to help them understand and develop tools to forecast 
liquidity exposure and mitigate their peak liquidity exposure.\66\ NSCC 
also stated that it would provide monthly and daily reports to Clearing 
Members that would show liquidity exposure during relevant periods.\67\ 
NSCC also stated that fluctuating peak activity recently has exceeded 
NSCC available total liquidity resources.\68\ NSCC believes these 
liquidity needs are largely driven by industry consolidation, 
developments in

[[Page 75417]]

trading techniques, including an increased use of high frequency 
trading, and a reduction in volatility from post-2008 financial crisis 
levels, generally resulting in a reduction in Clearing Fund 
requirements.\69\ In response to comments received regarding 
insufficient analysis of the burden on competition that might ensue 
from implementation of the SLD Proposal, NSCC substantially revised the 
SLD Proposal twice to expand its analysis of the burden on competition 
to include, for example, individual subsections specifically addressing 
competition concerns raised by commenters,\70\ and to reduce any 
disparate impact on Clearing Members stemming from implementation of 
the SLD Proposal, first to provide a mechanism by which non-bank 
affiliated Clearing Members could contribute to Credit Facility, and 
second to eliminate the Regular SLD from the Final SLD Proposal.\71\
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    \63\ See NSCC Letter II (stating that ``NSCC has seen continued 
increases in potential liquidity needs, driven by consolidation in 
the industry, developments in trading techniques (including a rise 
in high frequency trading), and a reduction in volatility from the 
post-[2008] crisis highs which result in reduced Clearing Fund 
requirements'').
    \64\ See Notice of Amendment No. 3, 78 FR 62846 (stating that 
the Final SLD Proposal would be implemented on February 1, 2014).
    \65\ See NSCC Letter I, NSCC Letter II, Notice of Amendment No. 
2, 78 FR 42140, Notice of Amendment No. 3, 78 FR 62846.
    \66\ See NSCC Letter I.
    \67\ See NSCC Letter I, NSCC Letter II.
    \68\ See NSCC Letter II.
    \69\ Id.
    \70\ See Notice of Amendment No. 2, 78 FR 42140. See also NSCC 
Letter I. NSCC argued that the SLD Proposal would apply fairly 
across Clearing Members and, while recognizing potential competitive 
impacts on such members, believed the SLD Proposal addressed 
important financial resource requirements. NSCC also stated that it 
was revising the SLD Proposal to address competition concerns.
    \71\ See Notice of Amendment No. 3, 78 FR 62846. See also NSCC 
Letter II.
---------------------------------------------------------------------------

    In response to comments regarding the lack of Clearing Member input 
in the SLD Proposal and that the development of the SLD Proposal 
without Clearing Member input was indicative of a lack of fair 
representation of all Clearing Members at NSCC, NSCC stated that it 
engaged in discussions with Clearing Members likely to be impacted by 
the SLD Proposal, including more than 100 meetings with Clearing 
Members to enhance Clearing Members' understanding of liquidity risks 
presented to NSCC and the SLD Proposal generally.\72\ The Proposed Rule 
Change and subsequent amendments were published for comment four times, 
so Clearing Members had an opportunity to comment, and NSCC also 
substantially revised the SLD Proposal twice as a direct response to 
comments received on the SLD Proposal.\73\ Finally, on September 18, 
2013, NSCC announced to its membership that it was forming the Clearing 
Agency Liquidity Council (``CALC''), an advisory group to continue the 
dialogue between NSCC and its Clearing Members regarding liquidity 
issues in a formal setting.\74\ According to NSCC, the CALC intends to 
explore additional liquidity resources in advance of the 2014 renewal 
of NSCC's Credit Facility, in order to address, for example, NSCC's 
liquidity needs outside of Special Periods and the refinancing risk 
associated with the annual renewal of the Credit Facility.\75\ 
According to NSCC, twenty-four Clearing Members joined the CALC, 
including all eight commenters to the SLD Proposal, which has met on 
multiple occasions since its inception.
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    \72\ See NSCC Letter I.
    \73\ See Notice of Amendment No. 2, 78 FR 42140, Notice of 
Amendment No. 3, 78 FR 62846. See also NSCC Letter II.
    \74\ DTCC Important Notice a7706, Creation of DTCC Clearing 
Agency Liquidity Council and Nomination Process (Sep. 18, 2013), 
http://dtcc.com/downloads/legal/imp_notices/2013/nscc/a7706.pdf.
    \75\ See NSCC Letter II. See also Notice of Amendment No. 2, 78 
FR 42140, Notice of Amendment No. 3, 78 FR 62846.
---------------------------------------------------------------------------

    NSCC responded to comments that the SLD Proposal did not contain 
sufficient information by amending the SLD Proposal twice to further 
identify the potential impact of the SLD Proposal on Clearing Members 
and to make substantive revisions to the SLD Proposal to address those 
concerns.\76\ NSCC responded to comments that the SLD Proposal did not 
protect investors by stating that the maintenance of adequate liquidity 
resources at NSCC, a designated systemically-important financial market 
utility \77\ that plays a fundamental role in the United States cash 
equities market, will protect against the transmission of systemic risk 
among Clearing Members in the event of a failure of one Clearing 
Member, thereby promoting the prompt and accurate settlement of 
securities transactions and the protection of investors.\78\ NSCC 
responded to the comment that it did not take into account other 
central counterparties imposing similar liquidity requirements by 
stating that such a concern was unlikely given the difference in 
liquidity risk between cash market central counterparties (i.e., NSCC), 
where potential liquidity needs typically are orders of magnitude 
greater than the market risk that their margin collections are designed 
to cover, and derivatives central counterparties, where liquidity needs 
generally are more closely aligned to market risk of members' 
portfolios and the members' margin requirements.\79\ In response to 
comments opposed to cash being the sole funding source by which a 
Clearing Member could satisfy a supplemental liquidity deposit, NSCC 
eliminated Regular SLD, thereby eliminating concern relating to 
disparate treatment that might ensue by requiring Clearing Members that 
do not make a commitment to lend to NSCC through the Credit Facility to 
make their Regular SLD funding obligation in cash, and NSCC states that 
the CALC will evaluate potential alternative collateral approaches that 
could be used to fund a portion of a Clearing Member's funding 
obligation.\80\
---------------------------------------------------------------------------

    \76\ See Notice of Amendment No. 2, 78 FR 42140, Notice of 
Amendment No. 3, 78 FR 62846. See also NSCC Letter II.
    \77\ Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf (``FSOC Designation'').
    \78\ See NSCC Letter I, NSCC Letter II. Designation as 
systemically-important by FSOC means that a failure of or disruption 
to its functioning could create, or increase, the risk of 
significant credit or liquidity problems spreading among financial 
institutions or markets, thereby threatening financial stability. 
See 12 U.S.C. 5462(9). See also FSOC Designation, supra note 77.
    \79\ See NSCC Letter II.
    \80\ Id. See also discussion below noting that any cash deposit 
is driven by the Clearing Member's own trading activity.
---------------------------------------------------------------------------

C. Comments to the Final SLD Proposal

    The Commission received two comments on the Final SLD Proposal. 
Both commenters supported NSCC's decision to eliminate the Regular SLD 
funding obligation from the SLD Proposal.\81\ One commenter argued for 
approval of the Final SLD Proposal, since the Final SLD Proposal ``is a 
helpful development in the process of determining how best to increase 
NSCC's liquidity resources to meet its liquidity needs.'' \82\ 
Moreover, the commenter believes that ``NSCC has addressed the area of 
greatest [m]ember concern in removing provisions of the [SLD] Proposal 
that collectively deal with the imposition of the Regular [SLD].'' \83\ 
One commenter argued for disapproval of the Final SLD Proposal, stating 
that flawed concepts remain and approval would unnecessarily inhibit 
the development of ideas from NSCC's CALC.\84\ NSCC did not submit a 
response to comments received after submission of the Final SLD 
Proposal.
---------------------------------------------------------------------------

    \81\ See ITG Letter III, Fidelity Letter III.
    \82\ See Fidelity Letter III.
    \83\ Id.
    \84\ See ITG Letter III.
---------------------------------------------------------------------------

V. Discussion and Commission Findings

    After careful review, the Commission finds that the Final SLD 
Proposal is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a registered clearing 
agency.\85\ In particular, the

[[Page 75418]]

Commission finds that the Final SLD Proposal is consistent with the 
following provisions of the Act: (i) Section 17A(b)(3)(A),\86\ which 
requires that a clearing agency ``is so organized and has the capacity 
to be able to facilitate the prompt and accurate clearance and 
settlement of securities transactions . . . to safeguard securities and 
funds in its custody and control and for which it is responsible . . . 
and to enforce . . . compliance by its participants with the rules of 
the clearing agency;'' (ii) Section 17A(b)(3)(F),\87\ which requires 
that: the rules of a clearing agency not be designed to permit unfair 
discrimination among participants in the use of the clearing agency; 
and the rules of a clearing agency promote the prompt and accurate 
clearance and settlement of securities transactions and protect 
investors and the public interest; (iii) Section 17A(b)(3)(D),\88\ 
which requires that the rules of a clearing agency provide for the 
equitable allocation of reasonable dues, fees, and other changes among 
its participants; and (iv) Section 17A(b)(3)(I),\89\ which requires the 
rules of a clearing agency not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.
---------------------------------------------------------------------------

    \85\ In approving the Proposed Rule Change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f). Comments about the 
potential competitive impact of the Proposed Rule Change are 
addressed above and below.
    \86\ 15 U.S.C. 78q-1(b)(3)(A).
    \87\ 15 U.S.C. 78q-1(b)(3)(F).
    \88\ 15 U.S.C. 78q-1(b)(3)(D).
    \89\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    The Commission's Order Instituting Proceedings solicited comment on 
a number of issues. After carefully considering the Final SLD Proposal 
and the comments received on the SLD Proposal and NSCC responses 
thereto, the Commission finds that the Final SLD Proposal is consistent 
with the Exchange Act and therefore must be approved.
    The Commission recognizes that some commenters did not support 
certain aspects of the SLD Proposal. The Commission, however, must 
approve a proposed rule change if it finds that the proposed rule 
change is consistent with the requirements of the Exchange Act and the 
applicable rules and regulations thereunder. No comments convinced the 
Commission that the Final SLD Proposal was not consistent with the 
Exchange Act and the applicable rules and regulations thereunder. The 
Commission believes that, overall, the Final SLD Proposal: (i) Will 
improve financial safety at NSCC by increasing its ability to meet its 
liquidity needs; (ii) provides for the equitable allocation of 
reasonable expenses; and (iii) does not permit unfair discrimination 
among Clearing Members in the use of NSCC or impose an unnecessary 
burden on competition. The Commission's analysis of the comments 
applicable to the Final SLD Proposal and the Final SLD Proposal's 
consistency with the Exchange Act are discussed below.
    As stated above, several commenters argued that the original SLD 
Proposal suffered from certain defects, such as a failure of NSCC to 
consult with Clearing Members prior to submitting the SLD Proposal,\90\ 
that the SLD Proposal contained an insufficient evaluation of the 
burden on competition, and an insufficient description of the SLD 
Proposal,\91\ and that NSCC did not demonstrate a specific need for 
additional liquidity in connection with the SLD Proposal.\92\
---------------------------------------------------------------------------

    \90\ See supra note 58.
    \91\ See supra note 56.
    \92\ See supra note 57.
---------------------------------------------------------------------------

    The Commission believes that the Final SLD Proposal is consistent 
with the Exchange Act and the applicable rules and regulations 
thereunder. NSCC made substantial revisions to the SLD Proposal 
directly responsive to comments raised during the comment period, 
created the CALC to continue the dialogue between NSCC and Clearing 
Members regarding liquidity generally, and provided a more robust 
description of the SLD Proposal and its potential effects on the 
competition between Clearing Members,\93\ in particular describing how 
the Final SLD Proposal addresses those potential effects.\94\
---------------------------------------------------------------------------

    \93\ See Notice of Amendment No. 2, 78 FR 42140, Notice of 
Amendment No. 3, 78 FR 62846, NSCC Letter I, NSCC Letter II.
    \94\ See Notice of Amendment No. 3, 78 FR 62846, NSCC Letter II.
---------------------------------------------------------------------------

    As stated above, all commenters expressed support for the notion 
that NSCC must have access to sufficient liquidity.\95\ One commenter 
stated that ``NSCC's critical role as a national clearance and 
settlement system'' made it so that adequate liquidity resources at 
NSCC was of paramount importance.\96\ The Commission believes that 
NSCC's maintenance of adequate Cover One liquidity resources helps 
ensure that orderly settlement can be completed notwithstanding the 
failure of its largest Clearing Member. The Commission further believes 
approval of the Final SLD Proposal is necessary to improve the overall 
financial safety of NSCC and its ability to complete settlement.
---------------------------------------------------------------------------

    \95\ See supra note 25.
    \96\ See ConvergEx Letter II.
---------------------------------------------------------------------------

    The Commission also notes that NSCC has stated that fluctuating 
peak liquidity needs presented to NSCC have exceeded total liquidity 
resources available to NSCC, emphasizing the need for NSCC to develop a 
mechanism to help ensure that it maintains adequate liquidity as soon 
as possible.\97\ These liquidity needs are driven by Clearing Members' 
trading activity, and the Final SLD Proposal is designed as a mechanism 
to allocate a funding obligation to those Clearing Members with peak 
liquidity needs that surpass NSCC available liquidity resources.
---------------------------------------------------------------------------

    \97\ See NSCC Letter II.
---------------------------------------------------------------------------

    The Commission also believes that the Final SLD Proposal provides a 
mechanism to help ensure that NSCC maintains sufficient liquidity 
prospectively. The Commission agrees with commenters that have 
suggested that historic peak liquidity is not necessarily predictive of 
future liquidity needs. To this point, the Final SLD Proposal permits 
Clearing Members to use a Prefund Deposit in cases where a Clearing 
Member anticipates that its current trading activity will surpass total 
liquidity resources at NSCC. Furthermore, in the event that a Clearing 
Member does not elect to make a Prefund Deposit but does present a 
liquidity need to NSCC above total liquidity resources that is not 
accounted for by a Special SLD funding obligation, NSCC may require the 
Clearing Members to fund the liquidity need by making a Call Deposit. 
The Commission believes that these tools provide NSCC with the means to 
access sufficient liquidity prospectively. For the above reasons, the 
Commission believes the SLD Proposal is consistent with the 
requirements of Exchange Act Sections 17A(b)(3)(A) and (F) regarding 
the prompt and accurate settlement of securities transactions.
    The Commission takes specific note of comments arguing that the 
costs of the Final SLD Proposal would have the unintended consequence 
of causing many Clearing Members to terminate their membership with 
NSCC and thereby concentrating the brokerage clearing business in fewer 
Clearing Members, potentially leading to an increase of systemic risk. 
The Commission recognizes that there are costs of the Final SLD 
Proposal for Clearing Members for which the Special SLD funding 
obligation applies. Clearing Members would be required to meet the 
Special SLD funding obligation in cash, which would be maintained by 
NSCC for a period of seven business days following the end of the 
Special Period.\98\ Furthermore, funds delivered to NSCC pursuant to a 
Call Deposit will

[[Page 75419]]

be maintained by NSCC for a period of 90 days.\99\
---------------------------------------------------------------------------

    \98\ See Notice, 78 FR at 21490.
    \99\ See Exhibit 5 to File No. SR-NSCC-2013-02, http://www.sec.gov/rules/sro/nscc/2013/34-70688-ex5.pdf.
---------------------------------------------------------------------------

    Under the Final SLD Proposal, Clearing Members would only be 
required to provide funding to the extent that the Clearing Member's 
trading activity during a two-year look-back period of correlated 
Special Period dates would have resulted in NSCC having insufficient 
liquidity resources to cover the default of that Clearing Member after 
taking into account all of NSCC's available liquidity resources at the 
time of default.\100\ The Special SLD funding obligation provides for 
an allocation formula that ratably applies to a subset of the 30 
Clearing Members that present largest peak liquidity needs to NSCC 
above NSCC's total liquidity resources during Special Periods.\101\ By 
allocating the funding obligation to those Clearing Members that 
directly create the liquidity need, the Final SLD Proposal helps to 
ensure that those Clearing Members who impose equivalent liquidity 
burdens on NSCC bear equivalent financial costs and allows each 
Clearing Member to exercise a degree of control over the funding 
obligation it bears. Accordingly, and notwithstanding the views 
expressed by commenters, the Commission believes that applying a 
liquidity obligation only to those Clearing Members that present a 
liquidity need to NSCC based on a historical look-back period above the 
total liquidity resources available to NSCC is an equitable allocation 
of expenses as required by Exchange Act Section 17A(b)(3)(D).
---------------------------------------------------------------------------

    \100\ Id. See also Notice, 78 FR at 21489.
    \101\ See Notice of Amendment No. 3, 78 FR at 62847.
---------------------------------------------------------------------------

    NSCC's application of the Special SLD funding obligation to no more 
than the 30 Clearing Members that present the highest peak liquidity 
exposures over a two-year look-back period during Special Periods \102\ 
prima facie has the effect of limiting that obligation to a subset of 
Clearing Members. However, a Special SLD funding obligation will not be 
imposed on a Clearing Member, irrespective of the rank of that Clearing 
Member's peak liquidity need vis-[agrave]-vis other Clearing Members, 
unless that Clearing Member's peak liquidity need surpassed NSCC's 
total liquidity resources.\103\
---------------------------------------------------------------------------

    \102\ Id. See also Exhibit 5 to File No. SR-NSCC-2013-02, http://www.sec.gov/rules/sro/nscc/2013/34-70688-ex5.pdf.
    \103\ See Notice of Amendment No. 3, 78 FR at 62847.
---------------------------------------------------------------------------

    Since whether an individual Clearing Member will have a Special SLD 
funding obligation is dependent solely upon the liquidity needs 
presented by that Clearing Member during the look-back period in excess 
of NSCC's then-available total liquidity resources, the Commission 
believes that expanding the Special SLD funding obligation to all 
Clearing Members is not necessary given the practical application of 
the rule to a subset of the 30 Clearing Members. Accordingly, despite 
the views expressed by some commenters, the Commission believes that 
limiting application of the Special SLD requirement to no more than 30 
Clearing Members is consistent with the requirement of Exchange Act 
Section 17A(b)(3)(D) that expenses be equitably allocated among 
Clearing Members.
    As stated above, the Commission recognizes that costs will be 
imposed through the Final SLD Proposal on Clearing Members for which 
the Special SLD funding obligation applies. The Commission also 
recognizes that some Clearing Members may make an economic decision to 
terminate their NSCC membership to avoid these costs. The Commission 
believes, however, that the Final SLD Proposal is a reasonable measure 
of the associated liquidity expenses experienced by NSCC and that the 
associated costs are necessary and appropriate for NSCC to ensure that 
it has the liquidity resources required to continue to operate in a 
safe and sound manner.
    Under the Final SLD Proposal, a funding obligation is generated 
when a Clearing Member's trading activity during a historic Special 
Period would have resulted in NSCC having insufficient liquidity 
resources to cover the default of that Clearing Member after taking 
into account all of NSCC's available liquidity resources at that time. 
As a result, a Special SLD funding obligation is the amount of the 
difference between a demonstrated peak total liquidity need created and 
current total liquidity resources available, which difference NSCC 
would be unable to account for through other liquidity resources.
    As for the unintended consequences associated with the Final SLD 
Proposal, the Commission agrees with NSCC that the maintenance of 
adequate liquidity at NSCC is a fundamental element in addressing the 
goal of reducing the potential systemic risk posed by a systemically-
important financial market utility \104\ and also a key component of 
NSCC's ability to prevent the failure of a Clearing Member from having 
a cascading effect on other Clearing Members. The Commission also 
believes that since Clearing Members exercise a degree of control over 
whether they will face an SLD funding obligation, they could explore 
alternatives to termination of membership to avoid incurring a Special 
SLD funding obligation, including changes to trading behavior so that 
their trading activity does not present a liquidity need to NSCC above 
NSCC's total available liquidity resources, as informed by the daily 
and monthly ``liquidity transaction'' reports to be provided by NSCC as 
part of the Final SLD Proposal.\105\ Accordingly, the Commission 
believes the expenses charged by NSCC through imposition of the Special 
SLD funding obligation are reasonable as required by Exchange Act 
Section 17A(b)(3)(D).
---------------------------------------------------------------------------

    \104\ See NSCC Letter I.
    \105\ See Notice of Amendment No. 2, 78 FR 42140, Notice of 
Amendment No. 3, 78 FR 62846, NSCC Letter II. With respect to the 
comments described above about NSCC requiring cash be deposited as 
collateral, the Commission believes that NSCC has addressed these 
comments and has stated that the CALC will evaluate potential 
alternative collateral approaches.
---------------------------------------------------------------------------

    For these reasons stated above, the Commission believes that the 
Final Proposed Rule Change containing the Final SLD Proposal meets the 
Section 17A(b)(3)(D) Exchange Act standard of equitable allocation of 
reasonable dues, fees, and other charges among its participants. The 
Commission finds it equitable that Clearing Members address the 
liquidity exposure that they actually present to NSCC during Special 
Periods and that such liquidity exposure is not borne by Clearing 
Members whose trading activity does not generate the liquidity need. 
Similarly, the Commission finds the Final SLD Proposal equitable in 
that two Clearing Members that produce the same liquidity need in 
excess of NSCC's total liquidity resources will be assessed the same 
Special SLD funding obligation. Furthermore, the Final SLD Proposal is 
equitable because it allows Clearing Members to anticipate and manage 
their own liquidity exposure to the clearing agency by changing their 
trading behavior. Finally, the Commission believes that the limitation 
in NSCC's rules to apply the Special SLD funding obligation to not more 
than 30 Clearing Members is not arbitrary or capricious because a 
Clearing Member's Special SLD funding obligation will depend solely 
upon its trading activity in relation to NSCC's total liquidity 
resources.
    Several commenters raised concerns regarding the perceived burdens 
on competition and asserted that there are

[[Page 75420]]

unfair and discriminatory impacts of the SLD Proposal, in particular 
with respect to an aspect of the eliminated Regular SLD funding 
obligation.\106\ However, no commenters argued that the Final SLD 
Proposal discriminated among Clearing Members in the use of the 
clearing agency or imposed an unnecessary or inappropriate burden on 
competition. Because a Special SLD funding obligation will be imposed 
only to the extent that an individual Clearing Member's trading 
activity over a two-year historical look-back period on corresponding 
days surpasses the total liquidity resources available to NSCC, only a 
small number of Clearing Members likely will incur a Special SLD 
funding obligation. While the Special SLD funding obligation will very 
likely only be met by a small number of Clearing Members, NSCC (i) will 
provide all members with a daily report regarding the liquidity 
exposure presented by such member, (ii) will provide similar monthly 
reports specifically to Clearing Members to help Clearing Members 
determine whether they should make Prefund Deposits or otherwise manage 
their liquidity exposure,\107\ and (iii) has created the CALC to ensure 
that the Special SLD funding obligation will continue to only 
reasonably and fairly impose a requirement on those Clearing Members 
that can foresee the liquidity exposure that they may present to NSCC 
during Special Periods.\108\
---------------------------------------------------------------------------

    \106\ See Citadel Letter II, Charles Schwab Letter I, Charles 
Schwab Letter II, Charles Schwab Letter III, Charles Schwab Letter 
IV, Charles Schwab Letter V, SIFMA Letter I, SIFMA Letter II, ITG 
Letter I, ITG Letter II, Knight Capital Letter, ConvergEx Letter I, 
ConvergEx Letter II.
    \107\ See Notice of Amendment No. 2, 78 FR 42140, Notice of 
Amendment No. 3, 78 FR 62846, NSCC Letter II.
    \108\ See NSCC Letter I, NSCC Letter II.
---------------------------------------------------------------------------

    As a result, the Commission believes that the Final SLD Proposal 
meets the requirements of Sections 17A(b)(3)(F) and (I) of the Exchange 
Act. To the extent the imposition of the Special SLD funding obligation 
results in a burden on competition because it levies a funding 
obligation on some Clearing Members but not others, such burden is 
necessary or appropriate for NSCC to ensure that it has the liquidity 
resources required to continue to operate in a safe and sound manner. 
Furthermore, the Special SLD funding obligation does not amount to 
unfair discrimination among Clearing Members in the use of the clearing 
agency because the funding requirement is correlated directly with 
trading activity that creates the actual liquidity need.

VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\109\ that the proposed rule change SR-NSCC-2013-02, as modified by 
Amendment Nos. 1, 2, and 3, be and hereby is approved, as of the date 
of this order or the date of the ``Notice of No Objection to Advance 
Notice Filing, as Modified by Amendment Nos. 1, 2, and 3, to Institute 
Supplemental Liquidity Deposits to [NSCC's] Clearing Fund Designed to 
Increase Liquidity Resources to Meet Its Liquidity Needs,'' SR-NSCC-
2012-802, whichever is later.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29497 Filed 12-10-13; 8:45 am]
BILLING CODE 8011-01-P


