
[Federal Register Volume 80, Number 196 (Friday, October 9, 2015)]
[Notices]
[Pages 61244-61246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25700]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76075; File No. SR-NSCC-2015-803]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of No Objection to Advance Notice Filing To Enhance 
NSCC's Margining Methodology as Applied to Family-Issued Securities of 
Certain NSCC Members

October 5, 2015.
    National Securities Clearing Corporation (``NSCC'') filed on August 
14, 2015 with the Securities and Exchange Commission (``Commission'') 
advance notice SR-NSCC-2015-803 (``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 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 Advance Notice was published for 
comment in the Federal Register on September 17, 2015.\4\ The 
Commission did not receive any comments on the Advance Notice. This 
publication serves as notice of no objection to the Advance Notice.
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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 Payment, Clearing and Settlement 
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\ 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. 75899 (September 11, 
2015), 80 FR 55883 (September 17, 2015) (File No. SR-NSCC-2015-803). 
NSCC also filed a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, 
seeking approval of changes to its Rules necessary to implement the 
Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. This proposed rule change was published in the Federal 
Register on September 2, 2015. Securities Exchange Act Release No. 
75768 (August 27, 2015), 80 FR 53219 (September 2, 2015) (SR-NSCC-
2015-003).
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I. Description of the Advance Notice

    As described by NSCC in the Advance Notice, NSCC has proposed 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 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 
Exchange Act,\6\ and the rules thereunder, or an advance notice with 
the Commission pursuant to Section 806(e)(1) of the Payment, Clearing 
and Settlement Supervision Act,\7\ and the rules thereunder.
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    \5\ See Section 4 of Rule 2B and Section I(B)(1) of Procedure XV 
of NSCC's Rules, supra Note 3.
    \6\ 15 U.S.C. 78s(b)(1).
    \7\ 12 U.S.C. 5465(e)(1).
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    As described by NSCC in the Advance Notice, NSCC, as a central 
counterparty (``CCP''), 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 CCP'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 a CCP 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

[[Page 61245]]

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 will 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 captures the 
risk characteristics of these positions will 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 will more effectively 
capture the risk characteristics of these positions and can help 
mitigate NSCC's exposure to wrong-way risk.
    NSCC stated in the Advance Notice that it 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 
Exchange Act,\9\ and the rules thereunder and an advance notice 
pursuant to Section 806(e)(1) of the Payment, Clearing and Settlement 
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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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.\11\ 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.\12\
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    \11\ See 12 U.S.C. 5461(b).
    \12\ Id.
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    Section 805(a)(2) of the Payment, Clearing and Settlement 
Supervision Act \13\ 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 \14\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \13\ 12 U.S.C. 5464(a)(2).
    \14\ 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.\15\ 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.\16\ 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.\17\
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    \15\ 17 CFR 240.17Ad-22.
    \16\ 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).
    \17\ 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,\18\ and 
the Clearing Agency Standards, in particular, Rule 17Ad-22(b)(1) \19\ 
and Rule 17Ad-22(b)(2) \20\ under the Exchange Act, as described in 
detail below.
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    \18\ Id.
    \19\ 17 CFR 240.17Ad-22(b)(1).
    \20\ 17 CFR 240.17Ad-22(b)(2).
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    Consistency with Section 805(b) of the Act. 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.\21\ 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 CCP, promote robust risk 
management, and thus contributing to the goal of maintaining financial 
stability in the event of a member default.
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    \21\ 12 U.S.C. 5464(b).
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    Consistency with Rule 17Ad-22(b)(1). Rule 17Ad-22(b)(1) \22\ under 
the Exchange Act requires a CCP, such as NSCC, to ``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

[[Page 61246]]

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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    \22\ 17 CFR 240.17Ad-22(b)(1).
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    Consistency with Rule 17Ad-22(b)(2). Rule 17Ad-22(b)(2) \23\ under 
the Exchange 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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    \23\ 17 CFR 240.17Ad-22(b)(2).
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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,\24\ that the 
Commission does not object to Advance Notice and that NSCC is 
authorized to implement the proposal.
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    \24\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25700 Filed 10-8-15; 8:45 am]
BILLING CODE 8011-01-P


