
[Federal Register Volume 82, Number 163 (Thursday, August 24, 2017)]
[Notices]
[Pages 40176-40178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-17911]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81439; File No. SR-NSCC-2017-015]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Amend and 
Clarify a Margin Charge Relating to CNS Fails Position

August 18, 2017
    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 August 11, 2017, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change would amend provisions in NSCC's Rules and 
Procedures (``Rules'') \3\ regarding an existing margin charge that is 
applied when a Member fails to settle a Short Position or a Long 
Position by the applicable settlement date (``CNS Fails Charge'') and 
would clarify NSCC's current practices with respect to the assessment 
and collection of the CNS Fails Charge.
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.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, 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 would (1) amend provisions in the Rules 
regarding the CNS Fails Charge, which NSCC currently imposes on each 
NSCC member (``Member''),\4\ as part of each Member's Required Deposit 
to the NSCC Clearing Fund, which is due at the start of each business 
day, when all conditions to the application of the charge, as described 
below, are met, and (2) clarify NSCC's current practices with respect 
to the assessment and collection of the CNS Fails Charge.
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    \4\ The CNS Fails Charge is currently imposed by NSCC pursuant 
to Procedure XV, Section I.(A)(1)(f). Id.
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(i) The Required Deposit and the CNS Fails Charge
    NSCC uses a risk-based margin methodology to assess Required 
Deposits from all Members. The Required Deposit is comprised of a 
number of risk-based component charges, including the CNS Fails Charge, 
which are calculated and assessed daily. The objective of the Required 
Deposit is to mitigate potential losses to NSCC associated with the 
liquidation of the Member's portfolio if NSCC ceases to act for a 
Member.\5\
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    \5\ When NSCC restricts a Member's access to services generally, 
NSCC is said to have ``ceased to act'' for the Member. Rule 46 
(Restrictions on Access to Services) sets out the circumstances 
under which NSCC may cease to act for a Member and the types of 
actions it may take. Supra note 3.
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    When a Member does not satisfy its obligation to either pay the net 
settlement proceeds or deliver the securities due by the applicable 
Settlement Date, NSCC, as a central counterparty, is exposed to credit 
and market risks. Such exposures generally increase when the Member's 
risk of default increases, as reflected by the Member's credit rating 
derived from the Credit Risk Rating Matrix.\6\ Therefore, in order to 
reduce the risk exposures to NSCC and to incentivize Members to satisfy 
their obligations relating to their outstanding trades on Settlement 
Date, NSCC currently calculates and collects the CNS Fails Charge from 
Members with Short Positions and/or Long Positions that did not settle 
on the Settlement Date (``CNS Fails Positions''). The amount of the CNS 
Fails Charge imposed on a Member varies based on the Member's credit 
rating derived from the Credit Risk Rating Matrix to reflect the 
potential increase in credit risk from Members with higher risk of 
default.
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    \6\ See Exchange Act Release Nos. 80734 (May 19, 2017), 82 FR 
24177 (May 25, 2017) (SR-NSCC-2017-002) and 80731 (May 19, 2017), 82 
FR 24174 (May 25, 2017) (SR-NSCC-2017-801).
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    This proposed rule change would amend the Rules regarding the CNS 
Fails Charge. Specifically, where certain percentages are used to 
calculate the CNS Fails Charge for a Member, the proposed rule change 
would amend the Rules to include such specific percentages. In doing 
so, the proposed rule change would add transparency as well as clarify 
NSCC's current practices with respect to the assessment and collection 
of this existing margin charge.
(ii) Calculation of the CNS Fails Charge
    For a Member with CNS Fails Positions, the CNS Fails Charge is 
calculated by multiplying the Current Market Value for such Member's 
aggregate CNS Fails Positions by a percentage. For a Member that is 
rated 1 through 4 on the Credit Risk Rating Matrix, the CNS Fails 
Charge is 5 percent of the Member's aggregate CNS Fails Positions. For 
a Member that is rated 5 or 6 on the Credit Risk Rating Matrix, the CNS 
Fails Charge is 10 percent of the Member's aggregate CNS Fails 
Positions. For a Member that is rated 7 on the Credit Risk Rating 
Matrix, NSCC is currently charging such Member 20 percent of the 
Member's

[[Page 40177]]

aggregate CNS Fails Positions--10 percent of the charge is imposed 
pursuant to Procedure XV, Section I.(A)(1)(f) and the remaining 10 
percent of the charge is imposed pursuant to Procedure XV, Section 
I.(B)(1). To improve the transparency of the CNS Fails Charge in the 
Rules and to clarify NSCC's current practices with respect to the 
assessment and collection of the CNS Fails Charge, NSCC is proposing to 
amend the Rules to provide that, for any Member that is rated 7 on the 
Credit Risk Rating Matrix, the CNS Fails Charge would be 20 percent of 
the Member's aggregate CNS Fails Positions. Members that are not rated 
by the Credit Risk Rating Matrix are not subject to the CNS Fails 
Charge; however, they can be placed on the Watch List as deemed 
necessary by NSCC to protect itself and its Members.\7\ Members that 
are placed on the Watch List are required to make additional Clearing 
Fund deposits when deemed necessary by NSCC from time to time.\8\
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    \7\ Section 4(c) of Rule 2B (Ongoing Membership Requirements and 
Monitoring), supra note 3.
    \8\ Section I.(B)(1) of Procedure XV (Clearing Fund Formula and 
Other Matters), supra note 3.
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(iii) Detailed Description of the Proposed Rule Changes
    NSCC is proposing to amend Rule 1 to add a definition for CNS Fails 
Position. The proposed definition would provide that the term ``CNS 
Fails Position'' means either a Long Position or a Short Position that 
did not settle on the Settlement Date.
    NSCC is also proposing to amend Procedure XV, Section I.(A)(1)(f) 
to provide that a Member's contribution to the Clearing Fund shall 
include an amount that is calculated by multiplying the Current Market 
Value for such Member's aggregate CNS Fails Positions by (i) 5 percent 
for Members rated 1 through 4 on the Credit Risk Rating Matrix, (ii) 10 
percent for Members rated 5 or 6 on the Credit Risk Rating Matrix, or 
(iii) 20 percent for Members rated 7 on the Credit Risk Rating Matrix.
2. Statutory Basis
    NSCC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. Specifically, NSCC believes 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \9\ and Rules 17Ad-22(e)(4), (e)(6)(i), and (e)(23)(i),\10\ 
each as promulgated under the Act, for the reasons described below.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 17 CFR 240.17Ad-22(e)(4), (e)(6)(i), and (e)(23)(i).
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    Section 17A(b)(3)(F) of the Act requires that the Rules be designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions and to assure the safeguarding of securities 
and funds which are in the custody or control of NSCC or for which it 
is responsible.\11\ The proposed rule changes to clarify NSCC's current 
practices regarding the assessment and collection of the CNS Fails 
Charge would provide transparency in the Rules with respect to the 
charge. By doing so, these proposed rule changes would ensure that the 
Rules remain transparent, accurate and clear, which would enable all 
stakeholders to readily understand their respective rights and 
obligations regarding NSCC's clearance and settlement of securities 
transactions. Therefore, NSCC believes that these proposed rule changes 
would promote the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act. In addition, the proposed rule changes to amend provisions in the 
Rules regarding the CNS Fails Charge would protect NSCC from potential 
losses in the event that a Member defaults. Specifically, the CNS Fails 
Charge is calculated and collected by NSCC from Members with CNS Fails 
Positions in order to mitigate the credit exposures to NSCC resulting 
from those positions. Mitigating NSCC's risk exposures from CNS Fails 
Positions would promote the safeguarding of securities and funds that 
are within NSCC's custody or control, consistent with the requirements 
of Section 17A(b)(3)(F) of the Act.
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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    Rule 17Ad-22(e)(4) under the Act requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor and 
manage its credit exposures to participants and those exposures arising 
from its payment, clearing and settlement processes.\12\ The CNS Fails 
Charge is being imposed on Members with CNS Fails Positions in order to 
reduce credit exposures to NSCC resulting from those positions. As 
proposed, it is designed to obtain from such Member financial resources 
commensurate with the credit exposures posed to NSCC by such Member's 
CNS Fails Positions. Therefore, NSCC believes that management of its 
credit exposures to its Members through the CNS Fails Charge is 
consistent with Rule 17Ad-22(e)(4) under the Act.
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    \12\ 17 CFR 240.17Ad-22(e)(4).
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    Rule 17Ad-22(e)(6)(i) under the Act requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to cover its credit exposures to its Members by 
establishing a risk-based margin system that, at a minimum, considers, 
and produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio and market.\13\ When 
applicable, the CNS Fails Charge is a component of a Member's Required 
Deposit and is designed to cover NSCC's credit exposures to Members 
with CNS Fails Positions. As described above, the CNS Fails Charge is 
determined based on the amount of CNS Fails Positions in a Member's 
portfolio and is commensurate with the Member's default risk. 
Therefore, NSCC believes the coverage of its credit exposures to its 
Members through the CNS Fails Charge is consistent with Rule 17Ad-
22(e)(6)(i) under the Act.
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    \13\ 17 CFR 240.17Ad-22(e)(6)(i).
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    Rule 17Ad-22(e)(23)(i) under the Act requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to publicly disclose all relevant rules and 
material procedures.\14\ The proposed rule change to clarify NSCC's 
current practices with respect to the assessment and collection of the 
CNS Fails Charge would also improve the transparency of the Rules 
regarding the CNS Fails Charge. As such, NSCC believes that the 
proposed rule change would promote disclosure of relevant rules and 
material procedures relating to the CNS Fails Charge and therefore is 
consistent with Rule 17Ad-22(e)(23)(i) under the Act.
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    \14\ 17 CFR 240.17Ad-22(e)(23)(i).
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change to amend the 
provisions in the Rules relating to the CNS Fails Charge would impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the Act.\15\ NSCC believes that the CNS Fails Charge is 
necessary for NSCC to limit its exposures to potential losses from 
defaults by Members with CNS Fails Positions. Additionally, NSCC 
believes that the CNS Fails Charge is appropriate because it is imposed 
on Members on an individualized basis and is reasonably calculated 
based on the Members' default risks as well as the risks posed to NSCC 
by the Members'

[[Page 40178]]

CNS Fails Positions. Therefore, NSCC believes any burden on competition 
imposed by the CNS Fails Charge would be necessary and appropriate in 
furtherance of the Act in order to limit NSCC's exposures to the risks 
being mitigated by such charge.
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    \15\ 15 U.S.C. 78q-1(b)(3)(I).
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    NSCC does not believe that the proposed rule change to clarify 
NSCC's current practices with respect to the assessment and collection 
of the CNS Fails Charge would impact competition.\16\ The proposed rule 
change would increase the transparency of the Rules regarding this 
existing charge and codify NSCC's current practices with respect to the 
assessment and imposition of the charge. As such, NSCC believes that 
this proposed rule change would not impact Members or have any impact 
on competition.
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    \16\ Id.
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments relating to this proposed rule change have not 
been solicited or received. 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 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-2017-015 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2017-015. 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 20549-1090 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-2017-015 and should be 
submitted on or before September 14, 2017.

    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. 2017-17911 Filed 8-23-17; 8:45 am]
BILLING CODE 8011-01-P


