
[Federal Register Volume 80, Number 180 (Thursday, September 17, 2015)]
[Notices]
[Pages 55883-55885]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-23283]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75899; File No. SR-NSCC-2015-803])


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

September 11, 2015.
    Pursuant to section 806(e)(1) of title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 \1\ (``Clearing 
Supervision Act'') and Rule 19b-4(n)(1)(i) \2\ under the Securities 
Exchange Act of 1934 (``Act''), notice is hereby given that on August 
14, 2015, National Securities Clearing Corporation (``NSCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
advance notice SR-NSCC-2015-803 (``Advance Notice'') as described in 
Items I and II below, which Items have been prepared by NSCC.\3\ The 
Commission is publishing this notice to solicit comments on the Advance 
Notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On August 14, 2015, NSCC filed this Advance Notice as a 
proposed rule change (SR-NSCC-2015-003) with the Commission pursuant 
to section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4, 
17 CFR 240.19b-4. A copy of the proposed rule change is available at 
http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This Advance Notice consists of amendments to NSCC's Rules & 
Procedures (``Rules'') in order to enhance NSCC's margining methodology 
as applied to family-issued

[[Page 55884]]

securities of those NSCC Members \4\ that are placed on NSCC's ``Watch 
List'', i.e. those Member [sic] 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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    \4\ 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 Advance Notice

    In its filing with the Commission, NSCC included statements 
concerning the purpose of and basis for the Advance Notice and 
discussed any comments it received on the Advance Notice. 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 and B 
below, of the most significant aspects of such statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
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 proposal 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 proposal in response to 
this outreach. NSCC will notify the Commission of any written comments 
received by NSCC.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act

Description of Change
    NSCC is proposing to enhance its margin methodology as applied to 
the family-issued securities of its Members that are on its Watch List 
\5\ 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,\6\ and the rules thereunder, or an advance notice with the 
Commission pursuant to section 806(e)(1) of the Clearing Supervision 
Act,\7\ and the rules thereunder.
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    \5\ 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 1 [sic].
    \6\ 15 U.S.C. 78s(b)(1).
    \7\ 12 U.S.C. 5465(e)(1).
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Anticipated Effect on and Management of Risk
    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.\8\ 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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    \8\ 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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    Therefore, the overall impact of NSCC's proposal, as described 
above, on risks presented by NSCC would be to reduce NSCC's exposure to 
this type of wrong-way risk by enhancing its margin methodology as 
applied to the family-issued securities of its Members that are on its 
Watch List, and present a heightened credit risk to the clearing agency 
or have demonstrated higher risk related to their ability to meet 
settlement. NSCC believes a reduction in its exposures to wrong-way 
risk through a margining methodology that more effectively capture 
[sic] the risk characteristics of these positions would contribute to 
the goal of maintaining financial stability in the event of a Member 
default and reduce systemic risk overall. 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 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

[[Page 55885]]

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,\9\ and the rules 
thereunder and an advance notice pursuant to section 806(e)(1) of the 
Clearing Supervision Act,\10\ and the rules thereunder.
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    \9\ 15 U.S.C. 78s(b)(1).
    \10\ 12 U.S.C. 5465(e)(1).
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    Consistency with the Clearing Supervision Act. The objectives and 
principles of section 805(b)(1) of the Clearing Supervision Act specify 
the promotion of robust risk management, promotion of safety and 
soundness, reduction of systemic risks and support of the stability of 
the broader financial system.\11\ 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 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.\12\ Rule 17Ad-22(b)(2), promulgated 
under the Act, requires NSCC to use risk-based models for setting 
margin requirements.\13\
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    \11\ 12 U.S.C. 5464(b)(1).
    \12\ 17 CFR 240.17Ad-22(b)(1).
    \13\ 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 proposal 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 proposal 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 proposal is consistent with the requirements of section 
805(b)(1) of the Clearing Supervision Act and Rule 17Ad-22(b)(1) and 
(2), promulgated under the Act, cited above.

III. Date of Effectiveness of the Advance Notice, and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. NSCC shall not implement the proposed change if the 
Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing NSCC with prompt written notice of the 
extension. The proposed change may be implemented in less than 60 days 
from the date the Advance Notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies NSCC in writing that it does not object to the proposed change 
and authorizes NSCC to implement the proposed change on an earlier 
date, subject to any conditions imposed by the Commission.
    NSCC shall post notice on its Web site of proposed changes that are 
implemented.
    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 Advance 
Notice is consistent with the Clearing Supervision 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-2015-803 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-2015-803. 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 Advance Notice that are filed 
with the Commission, and all written communications relating to the 
Advance Notice 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-2015-803 and should be submitted on 
or before October 8, 2015.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-23283 Filed 9-16-15; 8:45 am]
BILLING CODE 8011-01-P


