
[Federal Register Volume 80, Number 164 (Tuesday, August 25, 2015)]
[Notices]
[Pages 51638-51641]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-20929]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75730; File No. SR-NSCC-2015-802]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Amendment No. 1 and No Objection to 
Advance Notice Filing, as Modified by Amendment No. 1, to Establish a 
Prefunded Liquidity Program As Part of NSCC's Liquidity Risk Management

August 19, 2015.
    On June 26, 2015, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-NSCC-2015-802 (``Advance Notice'') 
pursuant to Section 806(e)(1) of the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Payment, Clearing and Settlement Supervision 
Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange 
Act of 1934 (``Exchange Act'') to establish a ``Prefunded Liquidity 
Program'' through the private placement of unsecured

[[Page 51639]]

debt. The Advance Notice was published for comment in the Federal 
Register on August 3, 2015.\3\ NSCC filed Amendment No. 1 to the 
Advance Notice on July 30, 2015.\4\ The Commission did not receive any 
comments on the Advance Notice. This publication serves as notice of 
filing Amendment No. 1 and of no objection to the Advance Notice, as 
modified by Amendment No. 1.
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    \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight 
Council designated NSCC a systemically important financial market 
utility on July 18, 2012. See Financial Stability Oversight Council 
2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, NSCC is 
required to comply with the Clearing Supervision Act and file 
advance notices with the Commission. See 12 U.S.C. 5465(e).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ See Securities Exchange Act Release No. 75541 (July 28, 
2015), 80 FR 46072 (August 3, 2015) (File No. SR-NSCC-2015-802).
    \4\ In Amendment No. 1, NSCC further specifies the proposed 
investment of the proceeds of the Prefunded Liquidity Program, as 
described below.
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I. Description of the Advance Notice, as Modified by Amendment No. 1

    As described by NSCC in its Advance Notice, as modified by 
Amendment No. 1, NSCC has proposed to establish the Prefunded Liquidity 
Program to raise prefunded liquidity and diversify its liquidity 
resources through the private placement of unsecured debt, consisting 
of a combination of short-term promissory notes (``Commercial Paper 
Notes'') and extendible-term promissory notes (``Extendible Notes,'' 
together with the Commercial Paper Notes, ``Notes''), to institutional 
investors in an aggregate amount not to exceed $5 billion. The proceeds 
from the Prefunded Liquidity Program will supplement NSCC's existing 
liquidity resources, which collectively provide NSCC with liquidity to 
complete end-of-day settlement in the event of the default of an NSCC 
Member.\5\
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    \5\ Terms not defined herein are defined in NSCC's Rules and 
Procedures (``Rules'') available at http://dtcc.com/~/media/Files/
Downloads/legal/rules/nscc_rules.pdf. The events that constitute a 
Member default are specified in NSCC's Rule 46 (Restrictions on 
Access to Services), which provides that NSCC's Board of Directors 
may suspend a Member or prohibit or limit a Member's access to 
NSCC's services in enumerated circumstances; this includes default 
in delivering funds or securities to NSCC, or a Member's 
experiencing such financial or operational difficulties that NSCC 
determines, in its discretion, that restriction on access to 
services is necessary for its protection and for the protection of 
its membership.
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    Terms of the Prefunded Liquidity Program. NSCC has engaged an 
issuing and paying agent, as well as certain placement agent dealers, 
to develop a program to issue the Notes. The Notes will be issued to 
institutional investors through a private placement and offered in 
reliance on an exemption from registration under Section 4(a)(2) of the 
Securities Act of 1933.\6\ NSCC will be party to certain transaction 
documents required to establish the Prefunded Liquidity Program, 
including an issuing and paying agent agreement and a dealer agreement 
with each of the placement agent dealers. The dealer agreements each 
will be based on the standard form of dealer agreement for commercial 
paper programs, which is published by the Securities Industry and 
Financial Markets Association. The material terms and conditions of the 
Prefunded Liquidity Program are summarized below.
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    \6\ 15 U.S.C. 77d(a)(2).
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    The Prefunded Liquidity Program will be established as a 
combination of both Commercial Paper Notes, which typically have 
shorter maturities, and Extendible Notes, which typically have longer 
maturities. NSCC intends to structure the Prefunded Liquidity Program 
such that the maturities of the issued Notes are staggered to avoid 
concentrations of maturing liabilities. The average maturity of the 
aggregate Notes outstanding issued under the Prefunded Liquidity 
Program is broadly estimated to range between three and six months. The 
Commercial Paper Notes and the Extendible Notes will be represented by 
one or more master notes issued in the name of The Depository Trust 
Company (``DTC'') or its nominee. The Notes will be issued only through 
the book-entry system of DTC and will not be certificated.
    The Commercial Paper Notes either will be interest bearing or sold 
at a discount from their face amount, and the Extendible Notes will be 
interest bearing. Interest payable on the Notes will be at market rates 
customary for such type of debt and reflective of the creditworthiness 
of NSCC. The Commercial Paper Notes will have a maturity not to exceed 
397 calendar days from the date of issue and will not be redeemable by 
NSCC prior to maturity, nor will they contain any provision for 
extension, renewal, automatic rollover or voluntary prepayment. The 
Extendible Notes will have an initial maturity of 397 calendar days 
from the date of issue. However, each month following the date of 
issue, the holder of an Extendible Note will be permitted to elect to 
extend the maturity of all or a portion of the principal amount of such 
Extendible Note for an additional 30 calendar days. A holder of an 
Extendible Note will be permitted to continue to extend its Extendible 
Note up to the final maturity date, which is expected to be a maximum 
of six years from the date of issue. If a holder of an Extendible Note 
fails to exercise its right to extend the maturity of all or a portion 
of the Extendible Note, such portion of the Extendible Note would be 
deemed to be represented by a new note (``Non-Extended Note''), and 
NSCC would have the option to redeem any Non-Extended Note in whole, 
but not in part, at any time prior to the maturity date of that Non-
Extended Note, which would be 12 months from the date on which they 
opted not to extend.
    NSCC will hold the proceeds from the issuance of the Notes in a 
cash deposit account at the Federal Reserve Bank of New York 
(``FRBNY'') \7\ and invest the proceeds in the same manner it invests 
Clearing Fund deposits in accordance with the DTCC Investment 
Policy.\8\ Pending the establishment of NSCC's account at the FRBNY, 
such proceeds will be maintained in accounts with creditworthy 
financial institutions and invested in the same manner as NSCC invests 
Clearing Fund deposits in accordance with the DTCC Investment Policy. 
Acceptable investments for Clearing Fund deposits under DTCC's 
Investment Policy include reverse repurchase agreements, money market 
mutual fund investments, bank deposits and commercial paper bank sweep 
deposits. In all cases, amounts will be available to draw to complete 
settlement as needed.
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    \7\ Pursuant to Section 806(a) under the Payment, Clearing and 
Settlement Supervision Act, and Section 234.6 of the Federal Reserve 
Regulation HH promulgated thereunder, NSCC, as a designated 
systemically important financial market utility under the Payment, 
Clearing and Settlement Supervision Act, has applied for a cash 
deposit account at the FRBNY, as well as subscription to ancillary 
FRBNY services that would facilitate the use of the requested cash 
deposit account. See 12 U.S.C. 5465(a); 12 CFR 234.6. The 
application is pending with the FRBNY as of the date of this notice.
    \8\ NSCC will submit a proposed rule change with the Commission 
pursuant to Section 19(b)(1) of the Exchange Act, and the rules 
thereunder, which specify how NSCC will invest the proceeds of the 
Notes under the DTCC Investment Policy. See 15 U.S.C. 78s(b)(1).
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    NSCC Liquidity Risk Management. As described by NSCC, as a central 
counterparty (``CCP''), NSCC occupies an important role in the 
securities settlement system by interposing itself between 
counterparties to financial transactions, thereby reducing the risk 
faced by its Members and contributing to global financial stability. 
NSCC's liquidity risk management framework plays an integral part in 
NSCC's ability to perform this role and is designed to ensure that NSCC 
maintains sufficient liquid resources to timely meet its payment 
(principally settlement) obligations with a high degree of confidence.
    NSCC's liquidity needs are driven by the requirement to complete 
end-of-day settlement, on an ongoing basis, in the event of Member 
default. If an NSCC Member defaults, as a CCP for the cash markets, 
NSCC would need to complete settlement of guaranteed transactions on 
the failing Member's behalf from the date of default through the 
remainder of

[[Page 51640]]

the settlement cycle (currently three days for securities that settle 
on a regular way basis in the U.S. equities markets).
    NSCC measures and manages its liquidity risk by performing daily 
simulations that measure the amount of liquidity NSCC would require in 
a number of scenarios, including amounts required over the settlement 
cycle in the event that the Member or Member family to which NSCC has 
the largest aggregate liquidity exposure defaults. NSCC seeks to 
maintain qualified liquidity resources in an amount sufficient to meet 
this requirement. NSCC's existing liquidity resources include: (1) The 
cash in NSCC's Clearing Fund; (2) the cash that would be obtained by 
drawing upon NSCC's committed 364-day credit facility with a consortium 
of banks (``Line of Credit''); and (3) additional cash deposits, known 
as ``Supplemental Liquidity Deposits,'' designed to cover the 
heightened liquidity exposure arising around monthly option expiry 
periods, required from those Members whose activity would pose the 
largest liquidity exposure to NSCC.\9\ The proceeds from the Prefunded 
Liquidity Program will supplement these liquidity resources. Further, 
NSCC will consider the proceeds from the Prefunded Liquidity Program to 
be qualifying liquidity resources under NSCC's Rule 4A.
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    \9\ Supplemental Liquidity Deposits are described in NSCC Rule 
4A.
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    NSCC states that by providing NSCC with additional, prefunded, and 
readily available liquidity resources to be used to complete end-of-day 
settlement as needed in the event of a Member default, the proposed 
Prefunded Liquidity Program will provide additional certainty, 
stability, and safety to NSCC, its Members, and the U.S. equities 
market that it serves. The Prefunded Liquidity Program also is designed 
to reduce NSCC's concentration risk with respect to its liquidity 
resources because it is anticipated that many of the potential 
institutional investors who would be purchasers of the Notes are not 
currently providing liquidity resources to NSCC.
    The Prefunded Liquidity Program was developed in coordination with 
a standing advisory group, the Clearing Agency Liquidity Council 
(``CALC''), which includes representatives of NSCC's Members and 
participants of NSCC's affiliate, the Fixed Income Clearing 
Corporation. The CALC was established in 2013 to facilitate dialogue 
between these clearing agencies and their participants regarding 
liquidity initiatives.

II. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, the Commission 
believes that the stated purpose of the Payment, Clearing and 
Settlement Supervision Act is instructive.\10\ The stated purpose of 
the Payment, Clearing and Settlement Supervision Act is to mitigate 
systemic risk in the financial system and promote financial stability 
by, among other things, promoting uniform risk management standards for 
systemically important financial market utilities and strengthening the 
liquidity of systemically important financial market utilities.\11\
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    \10\ See 12 U.S.C. 5461(b).
    \11\ Id.
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    Section 805(a)(2) of the Payment, Clearing and Settlement 
Supervision Act \12\ authorizes the Commission to prescribe risk 
management standards for the payment, clearing, and settlement 
activities of designated clearing entities and financial institutions 
engaged in designated activities for which it is the supervisory agency 
or the appropriate financial regulator. Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act \13\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \12\ 12 U.S.C. 5464(a)(2).
    \13\ 12 U.S.C. 5464(b).
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     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Payment, Clearing and Settlement Supervision Act 
(``Clearing Agency Standards'') and the Exchange Act.\14\ The Clearing 
Agency Standards became effective on January 2, 2013, and require 
registered clearing agencies to establish, implement, maintain, and 
enforce written policies and procedures that are reasonably designed to 
meet certain minimum requirements for their operations and risk 
management practices on an ongoing basis.\15\ As such, it is 
appropriate for the Commission to review advance notices against these 
Clearing Agency Standards, and the objectives and principles of these 
risk management standards as described in Section 805(b) of the 
Payment, Clearing and Settlement Supervision Act.\16\
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    \14\ 17 CFR 240.17Ad-22.
    \15\ The Clearing Agency Standards are substantially similar to 
the risk management standards established by the Board of Governors 
of the Federal Reserve System governing the operations of designated 
financial market utilities that are not clearing entities and 
financial institutions engaged in designated activities for which 
the Commission or the Commodity Futures Trading Commission is the 
Supervisory Agency. See Financial Market Utilities, 77 FR 45907 
(August 2, 2012).
    \16\ 12 U.S.C. 5464(b).
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    The Commission believes the proposal in the Advance Notice is 
consistent with the objectives and principles described in Section 
805(b) of the Payment, Clearing and Settlement Supervision Act,\17\ and 
the Clearing Agency Standards, in particular, Rule 17Ad-22(b)(3) \18\ 
under the Exchange Act, as described in detail below.
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    \17\ Id.
    \18\ 17 CFR 240.17Ad-22(b)(3).
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    The objectives and principles of Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act are to promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system.\19\ By 
diversifying the type and source of NSCC's liquidity, the Commission 
believes that the Prefunded Liquidity Program will reduce NSCC's 
overall liquidity risk consistent with prudent risk-management 
practices. Given that NSCC has been designated as a systemically 
important financial market utility,\20\ NSCC's ability to provide its 
clearing services upon a member default contributes to safety, 
soundness, and reduces systemic risks, all of which supports the 
stability of the broader financial system. Therefore, the Commission 
believes the proposal is consistent with the objectives and principles 
described in Section 805(b) of the Payment, Clearing and Settlement 
Supervision Act.
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    \19\ 12 U.S.C. 5464(b).
    \20\ Financial Stability Oversight Council, 2012 Annual Report, 
Appendix A, p. 110 and Appendix A, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Appendix%20A%20Designation%20of%20Systemically%20Important%20Market%20Utilities.pdf.
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    Rule 17Ad-22(b)(3) \21\ under the Exchange Act requires a CCP, such 
as NSCC, to ``establish, implement, maintain and enforce written 
policies and procedures reasonably designed to . . . [m]aintain 
sufficient financial resources to withstand, at a minimum, a default by 
the participant family to which it has the largest exposure in extreme 
but plausible market conditions . . . .'' NSCC's proposal to establish 
a Prefunded Liquidity Program will diversify NSCC's liquidity 
resources, further reduce NSCC's overall liquidity

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risk, and, thus, help it maintain sufficient financial resources to 
withstand, at a minimum, a default by an NSCC member to which NSCC has 
the largest exposure. As such, the Commission believes that the 
proposal is consistent with Rule 17Ad-22(b)(3).
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    \21\ 17 CFR 240.17Ad-22(b)(3).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Payment, Clearing and Settlement Supervision Act,\22\ that the 
Commission does not object to Advance Notice, as modified by Amendment 
No. 1, and that NSCC is authorized to implement the proposal.
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    \22\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-20929 Filed 8-24-15; 8:45 am]
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