
[Federal Register Volume 80, Number 170 (Wednesday, September 2, 2015)]
[Notices]
[Pages 53219-53221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-21670]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75768; File No. SR-NSCC-2015-003]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Enhance NSCC's 
Margining Methodology as Applied to Family-Issued Securities of Certain 
NSCC Members

August 27, 2015.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on August 14, 2015, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by NSCC.\3\ NSCC filed 
the proposed rule change pursuant to section 19(b)(2) \4\ of the Act. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On August 14, 2015, NSCC filed this proposed rule change as 
an advance notice (SR-NSCC-2015-803) with the Commission pursuant to 
section 806(e)(1) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act''), 12 U.S.C. 
5465(e)(1), and Rule 19b-4(n)(1)(i) of the Act, 17 CFR 240.19b-
4(n)(1)(i). A copy of the advance notice is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
    \4\ 15 U.S.C. 78s(b)(2).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to NSCC's Rules & 
Procedures (``Rules'') in order to enhance NSCC's margining methodology 
as applied to family-issued securities of NSCC Members \5\ that are 
placed on NSCC's ``Watch List'', i.e., those Members who present a 
heightened credit risk to NSCC or have demonstrated higher risk related 
to their ability to meet settlement, as more fully described below.
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    \5\ Terms not defined herein are defined in the Rules, available 
at http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
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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 and 
discussed any comments it received on the proposed

[[Page 53220]]

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. Purpose
    As a central counterparty, NSCC occupies an important role in the 
securities settlement system by interposing itself between 
counterparties to financial transactions and thereby reducing the risk 
faced by participants and contributing to global financial stability. 
The effectiveness of a central counterparty's risk controls and the 
adequacy of its financial resources are critical to achieving these 
risk-reducing goals. In that context, NSCC continuously reviews its 
margining methodology in order to ensure the reliability of its 
margining in achieving the desired coverage. In order to be most 
effective, NSCC must take into consideration the risk characteristics 
specific to certain securities when margining those securities.
    Among the various risks that NSCC considers when evaluating the 
effectiveness of its margining methodology are its counterparty risks 
and identification and mitigation of ``wrong-way'' risk, particularly 
specific wrong-way risk, defined as the risk that an exposure to a 
counterparty is highly likely to increase when the creditworthiness of 
that counterparty deteriorates.\6\ NSCC has identified an exposure to 
wrong-way risk when it acts as central counterparty to a Member with 
respect to positions in securities that are issued by that Member or 
that Member's affiliate. These positions are referred to as ``family-
issued securities.'' In the event that a Member with unsettled long 
positions in family-issued securities defaults, NSCC would close out 
those positions following a likely drop in the credit-worthiness of the 
issuer, possibly resulting in a loss to NSCC.
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    \6\ See Principles for financial market infrastructures, issued 
by the Committee on Payment and Settlement Systems and the Technical 
Committee of the International Organization of Securities 
Commissions 47 n.65 (April 2012), available at http://www.bis.org/publ/cpss101a.pdf.
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    NSCC is proposing to address its exposure to this type of wrong-way 
risk in two steps. First, NSCC proposes in this filing to enhance its 
margin methodology as applied to the family-issued securities of its 
Members that are on its Watch List \7\ by excluding these securities 
from the volatility component, or ``VaR'' charge, and then charging an 
amount calculated by multiplying the absolute value of the long net 
unsettled positions in that Member's family-issued securities by a 
percentage that is no less than 40%. The haircut rate to be charged 
would be determined based on the Member's rating on the credit risk 
rating matrix and the type of family-issued security submitted to NSCC. 
Fixed income securities that are family-issued securities would be 
charged a haircut rate of no less than 80% for firms that are rated 6 
or 7 on the credit risk rating matrix, and no less than 40% for firms 
that are rated 5 on the credit risk rating matrix; and equity 
securities that are family-issued securities would be charged a haircut 
rate of 100% for firms that are rated 6 or 7 on the credit risk rating 
matrix, and no less than 50% for firms that are rated 5 on the credit 
risk rating matrix. NSCC would have the authority to adjust these 
haircut rates from time to time within these parameters as described in 
Procedure XV of NSCC's Rules without filing a proposed rule change with 
the Commission pursuant to section 19(b)(1) of the Act,\8\ and the 
rules thereunder, or an advance notice with the Commission pursuant to 
section 806(e)(1) of the Clearing Supervision Act,\9\ and the rules 
thereunder.
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    \7\ As part of its ongoing monitoring of its membership, NSCC 
utilizes an internal credit risk rating matrix to rate its risk 
exposures to its Members based on a scale from 1 (the strongest) to 
7 (the weakest). Members that fall within the higher risk rating 
categories (i.e. 5, 6, and 7) are considered on NSCC's ``Watch 
List'', and may be subject to enhanced surveillance or additional 
margin charges, as permitted under NSCC's Rules. See Section 4 of 
Rule 2B and section I(B)(1) of Procedure XV of NSCC's Rules, supra 
Note 5.
    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 12 U.S.C. 5465(e)(1).
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    Because NSCC Members that are on its Watch List present a 
heightened credit risk to the clearing agency or have demonstrated 
higher risk related to their ability to meet settlement, NSCC believes 
that this charge would more effectively capture the risk 
characteristics of these positions and can help mitigate NSCC's 
exposure to wrong-way risk. NSCC proposes to amend section I(B)(1) of 
Procedure XV of its Rules, as marked on Exhibit 5 hereto,\10\ to 
enhance its margining methodology as described herein.
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    \10\ The Commission notes that Exhibit 5 is attached to the 
filing, not to this Notice.
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    Second, NSCC will continue to evaluate its exposures to wrong-way 
risk, specifically wrong-way risk presented by family-issued 
securities, including by reviewing the impact of expanding the 
application of the proposed margining methodology to the family-issued 
securities of those Members that are not on the Watch List. NSCC is 
proposing to apply the enhanced margining methodology to the family-
issued securities of Members that are on the Watch List at this time 
because, as stated above, these Members present a heightened credit 
risk to the clearing agency or have demonstrated higher risk related to 
their ability to meet settlement. As such, there is a clear and more 
urgent need to address NSCC's exposure to wrong-way risk presented by 
these firms' family-issued securities.
    However, any future change to the margining methodology as applied 
to the family-issued securities of Members that are not on the Watch 
List would be subject to a separate proposed rule change pursuant to 
section 19(b)(1) of the Act,\11\ and the rules thereunder, and an 
advance notice pursuant to section 806(e)(1) of the Clearing 
Supervision Act,\12\ and the rules thereunder.
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    \11\ 15 U.S.C. 78s(b)(1).
    \12\ 12 U.S.C. 5465(e)(1).
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    Implementation Timeframe. Subject to Commission approval of this 
proposed rule change, Members would be advised of the implementation 
date through issuance of an NSCC Important Notice. NSCC expects to run 
these changes in a test environment for a three month parallel period 
prior to implementation. Details and dates regarding this test would be 
communicated to Members through an NSCC Important Notice. As stated 
above, NSCC will conduct additional analysis of its exposure to wrong-
way risk, and, following implementation of this proposed rule change, 
will engage in outreach to its membership when evaluating whether to 
expand the application of the proposed enhanced margining methodology 
to Members not on its Watch List.
2. Statutory Basis
    Pursuant to section 17A(b)(3)(F) of the Act, NSCC's Rules must be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions.\13\ Rule 17Ad-22(b)(1), promulgated under the 
Act, requires NSCC to measure its credit exposures to its participants 
at least once a day and limit its exposures to potential losses from 
defaults by its participants under

[[Page 53221]]

normal market conditions so that the operations of the clearing agency 
would not be disrupted and non-defaulting participants would not be 
exposed to losses that they cannot anticipate or control.\14\ Rule 
17Ad-22(b)(2), promulgated under the Act, requires NSCC to use risk-
based models for setting margin requirements.\15\
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    \13\ 5 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(b)(1).
    \15\ 17 CFR 240.17Ad-22(b)(2).
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    By enhancing the margin methodology as applied to the family-issued 
securities of its Members that are on its Watch List, the proposed rule 
change would assist NSCC in collecting margin that more accurately 
reflects the risk characteristics of these securities, thereby limiting 
NSCC's exposures to potential losses from defaults by these Members 
under normal market conditions. By more closely capturing the risk 
characteristics of these positions, the proposed enhancement to the 
margining methodology would also assist NSCC in its continuous efforts 
to ensure the reliability and effectiveness of its risk-based margining 
methodology. In this way, the proposed rule change would help NSCC, as 
a central counterparty, maintain effective risk controls, contributing 
to the goal of maintaining financial stability in the event of a Member 
default.
    Therefore, NSCC believes the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
promulgated thereunder applicable to NSCC, in particular section 
17A(b)(3)(F) of the Act and Rule 17Ad-22(b)(1) and (2), promulgated 
under the Act, cited above.

(B) Clearing Agency's Statement on Burden on Competition

    The proposed rule change may impose a burden on competition by 
applying the enhanced margining methodology only to NSCC Members on 
NSCC's Watch List. However, NSCC believes any related burden on 
competition would be necessary and appropriate, as permitted by section 
17A(b)(3)(I) of the Act for a number of reasons.\16\
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    \16\ 5 U.S.C. 78q-1(b)(3)(I).
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    First, while NSCC will continue to review its exposures to wrong-
way risk and will consider expanding the application of the proposed 
margining methodology to additional Members, NSCC has determined to 
initially limit the applicability of the proposed rule change to 
Members on its Watch List because those Members present a heightened 
credit risk to the clearing agency or have demonstrated a higher risk 
in their ability to meet settlement. Second, by limiting NSCC's 
exposures to losses that it may face in clearing family-issued 
securities of such Members, the proposed rule change would contribute 
to the goal of maintaining financial stability in the event of the 
default of a Member on the Watch List, which would help facilitate the 
prompt and accurate clearance and settlement of securities transactions 
and protect investors and the public interest, in furtherance of the 
requirements of the Act applicable to NSCC, as discussed above.
    As such, NSCC believes any burden on competition resulting from the 
proposed rule change would be both necessary and appropriate in 
furtherance of the purposes of the Act, in particular section 
17A(b)(3)(F) of the Act and Rule 17Ad-22(b)(1) and (2), promulgated 
under the Act, cited above.

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

    In November 2013, NSCC engaged in outreach to its Members by 
providing those Members with a description of the proposed rule change 
and the results of an impact study showing the potential impact of this 
proposal on Members' Clearing Fund required deposits. NSCC did not 
receive any written comments relating to this proposed rule change in 
response to this outreach. NSCC will notify the Commission of any 
written comments received by NSCC.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such a proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NSCC-2015-003 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2015-003. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference 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 the filing also will be available 
for inspection and copying at the principal office of NSCC and on 
DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NSCC-2015-003 and should be 
submitted on or before September 23, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-21670 Filed 9-1-15; 8:45 am]
BILLING CODE 8011-01-P


