
[Federal Register Volume 81, Number 179 (Thursday, September 15, 2016)]
[Notices]
[Pages 63511-63514]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22157]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78808; File No. SR-NSCC-2016-004]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Describe the 
Backtesting Charge and the Bank Holiday Charge That May Be Imposed on 
Members

September 9, 2016.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 2, 2016, 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 the clearing agency. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to the Rules and 
Procedures of NSCC (``NSCC Rules'') \3\ in order to include two margin 
charges (the ``Backtesting Charge'' and ``Bank

[[Page 63512]]

Holiday Charge'' as further described below) that may be imposed on 
NSCC Members. The Backtesting Charge is assessed for those Members 
whose portfolios experience backtesting deficiencies over the prior 12-
month period, as described further below. The Backtesting Charge is 
calculated to mitigate exposures to the Corporation caused by 
settlement risks that may not be adequately captured by the 
Corporation's portfolio volatility model. The Bank Holiday Charge is 
applied to all NSCC Members on the business day prior to any day on 
which the U.S. equities markets are open for trading, but the Board of 
Governors of the Federal Reserve System observes a holiday and banks 
are closed (``Holiday''). The Bank Holiday Charge addresses the risk 
exposure that a Member's trading activity on the applicable Holiday 
poses to the Corporation. The proposed rule change would amend NSCC 
Procedure XV to include the Backtesting Charge and Bank Holiday Charge 
as additional charges that may be added to its Members' Clearing Fund 
Required Deposit, including the manner and circumstances in which NSCC 
calculates and imposes such charges. NSCC is filing this proposed rule 
change in order to provide transparency in the NSCC Rules with respect 
to these existing charges, as described in greater detail below.
---------------------------------------------------------------------------

    \3\ The NSCC Rules are available at http://www.dtcc.com/legal/rules-and-procedures. Capitalized terms used herein and not 
otherwise defined shall have the meaning assigned to such terms in 
the NSCC Rules.
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency 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
    The proposed rule change provides transparency in the NSCC Rules 
with respect to the Backtesting Charge and the Bank Holiday Charge, two 
margin charges that NSCC may temporarily impose on a Member as part of 
such Member's Required Deposit to the NSCC Clearing Fund.
    NSCC may impose the Backtesting Charge on an NSCC Member when the 
Corporation has observed deficiencies in the backtesting of such 
Member's Required Deposit over the prior 12-month period, such that 
NSCC determines the value-at-risk (``VaR'') margin charge being 
calculated for that Member may not fully address the projected 
liquidation losses estimated from that Member's settlement activity.
    The Bank Holiday Charge addresses the risk exposure that occurs on 
Holidays when NSCC is unable to collect Clearing Fund from its Members. 
NSCC imposes the Bank Holiday Charge on all Members to cover the 
additional day of exposure that is not contemplated in the prior day's 
VaR charge.
(i) Background
A. Backtesting and the Required Deposit
    NSCC's Clearing Fund addresses potential Member exposure through a 
number of risk-based component charges (as margin) calculated and 
assessed daily. Each of the component charges collectively constitute 
[sic] a Member's Required Deposit. The objective of the Required 
Deposit is to mitigate potential losses to NSCC associated with 
liquidation of the Member's portfolio in the event that NSCC ceases to 
act for a Member (hereinafter referred to as a ``default''). NSCC 
determines Required Deposit amounts using a risk-based margin 
methodology that is intended to capture market price risk. The 
methodology uses historical market moves to project or forecast the 
potential gains or losses on the liquidation of a defaulting Member's 
portfolio, assuming that a portfolio would take three days to liquidate 
or hedge in normal market conditions. The projected liquidation gains 
or losses are used to determine the Member's Required Deposit, which is 
calculated to cover projected liquidation losses at a 99 percent 
confidence level. The aggregate of all Members' Required Deposits 
constitutes NSCC's Clearing Fund, which NSCC would be able to access 
should a defaulting Member's own Required Deposit be insufficient to 
satisfy losses to NSCC caused by the liquidation of that Member's 
portfolio.
    NSCC employs daily backtesting to determine the adequacy of each 
Member's Required Deposit. NSCC compares the Required Deposit \4\ for 
each Member with the simulated liquidation gains/losses using the 
actual positions in the Member's portfolio, and the actual historical 
security returns. NSCC investigates the cause(s) of any backtesting 
deficiencies. As a part of this investigation, NSCC pays particular 
attention to Members with backtesting deficiencies that bring the 
results for that Member below the 99 percent confidence target (i.e., 
greater than two backtesting deficiency days in a rolling twelve-month 
period) to determine if there is an identifiable cause of repeat 
backtesting deficiencies. NSCC also evaluates whether multiple Members 
may experience backtesting deficiencies for the same underlying reason.
---------------------------------------------------------------------------

    \4\ For backtesting comparisons, NSCC uses the Required Deposit 
amount, without regard to the actual collateral posted by the 
Member.
---------------------------------------------------------------------------

    While multiple factors may contribute to a Member's backtesting 
deficiency, NSCC has observed that some Members with position increases 
after the calculation of their Required Deposit may incur backtesting 
deficiencies due to the additional exposure that is not mitigated until 
the collection of the Required Deposit on the next business day.
B. Calculation of the Backtesting Charge
    The objective of the Backtesting Charge is to increase Required 
Deposits for Members that are likely to experience backtesting 
deficiencies on the basis described above by an amount sufficient to 
maintain such Member's backtesting coverage above the 99 percent 
confidence threshold. Because the settlement activity and size of the 
backtesting deficiencies varies among impacted Members, NSCC must 
assess a Backtesting Charge that is specific to each impacted Member. 
To do so, NSCC examines each impacted Member's historical backtesting 
deficiencies observed over the prior 12-month period to identify the 
three largest backtesting deficiencies that have occurred during that 
time. The presumptive Backtesting Charge amount equals that Member's 
third largest historical backtesting deficiency, subject to adjustment 
as further described below. NSCC believes that applying an additional 
margin charge equal to the third largest historical backtesting 
deficiency to a Member's Required Deposit would bring the Member's 
historically-observed backtesting coverage above the 99 percent 
target.\5\ If assessed, the resulting Backtesting Charge is added to 
the Required Deposit for such Member determined pursuant to NSCC's 
risk-based margining methodology, and is imposed on a daily basis for a 
one-month period.
---------------------------------------------------------------------------

    \5\ Each occurrence of a backtesting deficiency reduces a 
Member's overall backtesting coverage by 0.4 percent (1 exception/
250 observation days). Accordingly, an increase equal to the third 
largest backtesting deficiency would bring backtesting coverage up 
to 99.2 percent.
---------------------------------------------------------------------------

    This charge is only applicable to those Members whose overall 12-
month

[[Page 63513]]

trailing backtesting coverage falls below the 99 percent coverage 
target.
    Although the third largest historical backtesting deficiency for a 
Member is used as the Backtesting Charge in most cases, NSCC retains 
discretion to adjust the charge amount based on other circumstances 
that may be relevant for assessing whether an impacted Member is likely 
to experience future backtesting deficiencies and the estimated size of 
such deficiencies. Examples of relevant circumstances that would be 
considered in calculating the final, applicable Backtesting Charge 
amount include material differences in the three largest backtesting 
deficiencies observed over the prior 12-month period, variability in 
the net settlement activity after the collection of the Member's 
Required Deposit, seasonality in observed backtesting deficiencies and 
observed market price volatility in excess of the Member's historical 
VaR charge. Based on NSCC's assessment of the impact of these 
circumstances on the likelihood of, and estimated size of, future 
backtesting deficiencies for a Member, NSCC may, in its discretion, 
adjust the Backtesting Charge for such Member in an amount that NSCC 
determines to be more appropriate for maintaining such Member's 
backtesting results above the 99 percent coverage threshold (including 
a reasonable buffer).
C. Communication With Members and Imposition of the Backtesting Charge
    If NSCC determines that a Backtesting Charge should apply to a 
Member that was not assessed a Backtesting Charge during the 
immediately preceding month or that the Backtesting Charge applied to a 
Member during the previous month should be increased, NSCC will notify 
the Member on or around the 25th calendar day of the month prior to the 
assessment of the Backtesting Charge, or prior to the increase to the 
Backtesting Charge.
    NSCC imposes the Backtesting Charge as an additional charge applied 
to each impacted Member's Required Deposit on a daily basis for a one 
month period, and reviews each applied Backtesting Charge each month. 
If an impacted Member's trailing 12-month backtesting coverage exceeds 
99 percent (without taking into account historically-imposed 
Backtesting Charges), the Backtesting Charge is removed.
D. Holidays and the Required Deposit
    As described above, NSCC determines its Members' Required Deposit 
amounts using a risk-based margin methodology that is intended to 
capture market price risk, assuming that a portfolio would take three 
days to liquidate or hedge in normal market conditions.
    The Bank Holiday Charge may be applied on the business day prior to 
any Holiday. This charge approximates the exposure that a Member's 
trading activity on the applicable Holiday could pose to NSCC. Since 
NSCC cannot collect margin on the Holiday, the Bank Holiday Charge is 
due on the business day prior to the applicable Holiday.
E. Calculation and Notification of the Holiday Charge
    NSCC would determine the appropriate methodology for calculating 
the Bank Holiday Charge in advance of each applicable Holiday. 
Potential methodologies for calculating the Bank Holiday Charge 
include, for example, time scaling of the VaR charge \6\ or application 
of stress scenarios that cover potential market price risk exposure 
that may not be appropriately covered by scaling the VaR charge. NSCC 
would establish a methodology for calculating each Bank Holiday Charge 
that would take into consideration the market conditions prevailing at 
that time in order to permit NSCC to calculate a Bank Holiday Charge 
that appropriately estimates the risk that may be presented to NSCC on 
the applicable Holiday, when Members' Required Deposit cannot be 
collected. The Bank Holiday Charge would represent a percentage 
increase of the volatility charge on the business day prior to the 
Holiday, and such percentage increase applies uniformly to all Members. 
This means that if the Bank Holiday Charge is levied, the same 
methodology (i.e., formula) is applied to all Members (that is, the 
Bank Holiday Charge is not a set dollar amount applied to all Members).
    Members would be notified of the applicable methodology by an 
Important Notice issued no later than 10 business days prior to the 
application the Bank Holiday Charge, and the charge is collected on the 
business day prior to the applicable Holiday. The Bank Holiday Charge 
is removed from the Required Deposit on the business day following the 
Holiday.
[GRAPHIC] [TIFF OMITTED] TN15SE16.009

2. Statutory Basis
    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to assure the safeguarding of 
securities and funds that are within the custody or control of the 
clearing agency.\7\ Rule 17Ad-22(b)(1) under the Act requires a 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed 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.\8\ Rule 17Ad-
22(b)(2) under the Act requires a clearing agency to maintain and 
enforce written policies and procedures reasonably designed to use 
margin requirements to limit its credit exposures to participants under 
normal market conditions.\9\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 17 CFR 240.17Ad-22(b)(1).
    \9\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

    By incorporating the Backtesting Charge and the Bank Holiday Charge 
into the NSCC Rules, the proposed change addresses exposure that could 
subject NSCC to potential losses under normal market conditions in the 
event that a Member defaults. Specifically, the proposed rule change 
seeks to remedy potential situations that are described above where 
NSCC could be undermargined by requiring additional margin. Therefore, 
NSCC believes the

[[Page 63514]]

proposed rule change enhances the safeguarding of securities and funds 
that are in the custody or control of NSCC, consistent with section 
17(b)(3)(F) of the Act.
    NSCC's Backtesting Charge is calculated and imposed to cover credit 
exposures estimated by NSCC based on historical backtesting 
deficiencies with the goal of maintaining each Member's Required 
Deposit above the 99 percent coverage threshold. This management of 
NSCC's credit exposures to Members is consistent with Rule 17Ad-
22(b)(1) under the Act. Further, the charge is part of the Members' 
Required Deposits designed to maintain the coverage of credit exposures 
at a confidence level of at least 99 percent, which limits NSCC's 
exposures to Members under normal market conditions. It therefore is 
also consistent with Rule 17Ad-22(b)(2) under the Act. The proposed 
Backtesting Charge seeks to address backtesting deficiencies that could 
potentially leave NSCC undermargined by using the risk-based 
methodology described above to limit its credit exposure to Members.
    NSCC's Bank Holiday Charge is calculated and imposed to cover 
credit exposures that results from market price moves that occur on a 
Holiday and are not incorporated in each Member's Required Deposit. 
This management of NSCC's credit exposures to Members is consistent 
with Rules 17Ad-22(b)(1) and 17Ad-22(b)(2) under the Act.

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

    NSCC does not believe that either the Backtesting Charge or the 
Bank Holiday Charge impose any burden on competition that is not 
necessary or appropriate.\10\ These charges are necessary for NSCC to 
limit its exposure to potential losses from defaults by Members.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    The Backtesting Charge is imposed on each Member on an 
individualized basis in an amount reasonably calculated to maintain its 
Required Deposit above NSCC's 99 percent coverage threshold. NSCC 
employs reasonable methods to calculate and impose an individualized 
charge in an amount designed to maintain each impacted Member's future 
backtesting coverage above the 99 percent coverage threshold, including 
a reasonable buffer.
    Because the market price movements that occur on Holidays are 
related to the behavior of the market as a whole, the impact of such 
price movements on NSCC's risk is considered general market price risk. 
Therefore, the Bank Holiday Charge is imposed on all Members on a 
uniform basis in an amount reasonably calculated to mitigate the market 
price changes that could occur on a Holiday when banks are closed and 
NSCC is unable to collect Clearing Fund. The Bank Holiday Charge would 
represent a percentage increase of the volatility charge on the 
business day prior to the Holiday, and such percentage increase applies 
uniformly to all Members. This means that if the Bank Holiday Charge is 
levied, the same methodology (i.e., formula) is applied to all Members 
(that is, the Bank Holiday Charge is not a set dollar amount applied to 
all Members).
    NSCC believes any burden on competition imposed by the addition of 
these two charges to the NSCC Rules would be necessary and appropriate 
to limit NSCC's exposures to the risks being mitigated by such charges.

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

    NSCC has not received any written comments relating to this 
proposal. NSCC will notify the Commission of any written comments 
received.

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 proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2016-004 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2016-004. 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-2016-004 and should be 
submitted on or before October 6, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2016-22157 Filed 9-14-16; 8:45 am]
 BILLING CODE 8011-01-P


