
[Federal Register Volume 80, Number 196 (Friday, October 9, 2015)]
[Notices]
[Pages 61256-61258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25702]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76077; File No. SR-NSCC-2015-003]


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

October 5, 2015.
    On August 14, 2015, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2015-003 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ to change its margin charge with respect 
to a member's positions in securities that are issued by such member or 
its affiliate (i.e., ``family-issued securities'') by excluding 
positions in these securities, when the member is on NSCC's Watch 
List,\3\ from its volatility margining model. The proposed rule change 
was published for comment in the Federal Register on September 2, 
2015.\4\ The Commission did not receive comment letters regarding the 
proposed change. For the reasons discussed below, the Commission is 
granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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 weakest three rating 
categories (i.e., 5, 6, and 7) are placed on NSCC's ``Watch List'' 
and, as provided under NSCC's Rules and Procedures (``Rules''), may 
be subject to enhanced surveillance or additional margin charges. 
See Section 4 of Rule 2B and Section I(B)(1) of Procedure XV of 
NSCC's Rules, available at http://dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
    \4\ See Securities Exchange Act Release No. 75768 (August 27, 
2015), 80 FR 53219 (September 2, 2015) (SR-NSCC-2015-003). NSCC also 
filed an advance notice with the Commission seeking approval of 
changes to its Rules necessary to implement the proposed rule 
change. This advance notice was published in the Federal Register on 
September 17, 2015. Securities Exchange Act Release No. 75899 
(September 11, 2015), 80 FR 55883 (September 17, 2015) (File No. SR-
NSCC-2015-803).
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I. Description of the Proposed Rule Change

    The following is a description of the proposed rule change, as 
provided by NSCC:
    The proposed rule change consists of amendments to NSCC's 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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Background

    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

[[Page 61257]]

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 has proposed to address its exposure to this type of wrong-way 
risk in two steps. First, NSCC has proposed in this filing to enhance 
its margin methodology as applied to the family-issued securities of 
its Members that are on its Watch List 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 
will 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 will 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 will 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 will 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,\7\ and the 
rules thereunder, or an advance notice with the Commission pursuant to 
Section 806(e)(1) of the Clearing Supervision Act,\8\ and the rules 
thereunder.
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    \7\ 15 U.S.C. 78s(b)(1).
    \8\ 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 will more effectively capture the risk characteristics 
of these positions and can help mitigate NSCC's exposure to wrong-way 
risk.
    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 has 
proposed 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,\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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Implementation

    The effective date of the proposed rule change will be announced 
via a 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 will 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.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \11\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. The Commission believes the proposal is 
consistent with Section 17A(b)(3)(F) of the Act,\12\ and Rule 17Ad-
22(b)(1) \13\ and Rule 17Ad-22(b)(2) \14\ under the Act, as described 
in detail below.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(b)(1).
    \14\ 17 CFR 240.17Ad-22(b)(2).
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    Consistency with Section 17A(b)(3)(F) of the Act. Section 
17A(b)(3)(F) of the Act requires, among other things, that the rules of 
a clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions, as well as, in 
general, protect investors and the public interest.\15\ By enhancing 
the margin methodology applied to family-issued securities of members 
that are on NSCC's Watch List, the proposal will assist NSCC in 
collecting margin that more accurately reflects NSCC's exposure to a 
clearing member that clears family-issued securities and will assist 
NSCC in its continuous efforts to improve the reliability and 
effectiveness of its risk-based margining methodology by taking into 
account specific wrong-way risk. As such, the proposal will help NSCC, 
as a central counterparty, promote robust risk management, and thus 
promoting the prompt and accurate clearance and settlement of 
securities transactions, as well as, in general, protecting investors 
and the public interest.
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    Consistency with Rule 17Ad-22(b)(1). Rule 17Ad-22(b)(1) \16\ under 
the Act requires a CCP, such as NSCC, to

[[Page 61258]]

``establish, implement, maintain and enforce written policies and 
procedures reasonably designed to . . . limit its exposures to 
potential losses from defaults by its participants under normal market 
conditions . . . .'' NSCC faces specific wrong-way risk in all 
circumstances where a member submits family-issued securities to NSCC 
for clearance, including under normal market conditions. By enhancing 
the margin methodology applied to family-issued securities of NSCC's 
members that are on its Watch List, the proposal will limit NSCC's 
exposure to potential losses from the default of a member on NSCC's 
Watch List with family-issued securities under normal market 
conditions. As such, the Commission believes that the proposal is 
consistent with Rule 17Ad-22(b)(1).
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    \16\ 17 CFR 240.17Ad-22(b)(1).
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    Consistency with Rule 17Ad-22(b)(2). Rule 17Ad-22(b)(2) \17\ under 
the Act requires a CCP, such as NSCC, to ``establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to . . . [u]se margin requirements to limit its credit 
exposures to participants under normal market conditions and use risk-
based models and parameters to set margin requirements . . . '' By 
enhancing the margin methodology applied to family-issued securities of 
NSCC's members that are on its Watch List, the proposal will better 
account for and cover NSCC's credit exposure to less creditworthy 
members. In addition, by taking into account specific wrong-way risk 
arising from family-issued securities submitted to NSCC, the proposal 
is consistent with using risk based models and parameters to set margin 
requirements. As such, the Commission believes that the proposal is 
consistent with Rule 17Ad-22(b)(2).
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    \17\ 17 CFR 240.17Ad-22(b)(2).
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IV. 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 \18\ and the 
rules and regulations thereunder.
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    \18\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule change SR-NSCC-2015-003 be, and hereby is, 
APPROVED.\19\
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    \19\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25702 Filed 10-8-15; 8:45 a.m.]
BILLING CODE 8011-01-P


