[Federal Register Volume 83, Number 1 (Tuesday, January 2, 2018)]
[Notices]
[Pages 176-179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-28221]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82403; File No. SR-NSCC-2017-807]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Advance Notice To Increase the 
Authorized Amount Under the Prefunded Liquidity Program

December 26, 2017.
    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 (``Clearing 
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934, as amended (``Act''),\2\ notice is hereby given 
that on December 12, 2017, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the advance notice SR-NSCC-2017-807 (``Advance 
Notice'') 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 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).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    The advance notice of NSCC proposes to increase the aggregate 
amount of short-term promissory notes (``Commercial Paper'') and 
extendible-term promissory notes (``Extendible Notes'' and, together 
with the Commercial Paper, ``Notes'') that NSCC is authorized to issue 
and sell, as further described below.\3\
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    \3\ Terms not defined herein are defined in the Rules and 
Procedures of NSCC (``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 Advance Notice

    In its filing with the Commission, the clearing agency 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. The clearing agency 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

    NSCC has not solicited or received any written comments relating to 
this proposal. 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 the Proposal
    NSCC maintains a program to issue and sell the Notes (``Prefunded 
Liquidity Program'' or the ``Program''), and is currently authorized to 
issue and sell the Notes in an aggregate amount up to $5 billion.\4\ 
NSCC is proposing to increase the aggregate amount of Notes it would be 
authorized to issue and sell under the Program to $10 billion.
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    \4\ The principal terms of the Prefunded Liquidity Program are 
described in an advance notice (SR-NSCC-2015-802) (``2015 Advance 
Notice'') filed with the Commission pursuant to Section 806(e)(1) of 
the Clearing Supervision Act and Rule 19b-4(n)(1)(i) under the Act. 
See Securities Exchange Act Release No. 75730 (August 19, 2015), 80 
FR 51638 (August 25, 2015) (SR-NSCC-2015-802).
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    Management of the Prefunded Liquidity Program. Pursuant to the 
terms and conditions described in the 2015 Advance Notice, NSCC issues 
Notes to institutional investors, and invests the proceeds in 
accordance with the Clearing Agency Investment Policy.\5\ The Program 
is managed and monitored daily by the Treasury group (``Treasury'').\6\ 
NSCC has structured the Prefunded Liquidity Program such that the 
maturities of the issued Notes are staggered to avoid concentrations of 
maturing liabilities. The majority of the Notes issued and sold under 
the Program to date have been Commercial Paper, however, NSCC maintains 
the flexibility to issue and sell any combination of Commercial Paper 
and Extendible Notes up to the authorized amount in order to allow it 
to adjust to the market for each of these types of Notes and to stagger 
the maturities of the outstanding Notes. Treasury also maintains and 
adheres to internal guidelines that limit the amount of Notes that can 
mature within any one-week period. The weighted average maturity of the 
aggregate Notes outstanding issued under the Prefunded Liquidity 
Program have generally ranged between one and two months, and, in order 
to maintain the staggered maturity structure, the weighted average 
maturity of the Notes would be expected

[[Page 177]]

to increase under the proposal to approximately three to six months.
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    \5\ See Securities Exchange Act Release No. 79528 (December 12, 
2016), 81 FR 91232, (December 16, 2016) (SR-DTC-2016-007; SR-FICC-
2016-005; SR-NSCC-2016-003). The 2015 Advance Notice stated that the 
proceeds from the issuance of the Notes would be held in a cash 
deposit account at the Federal Reserve Bank of New York (``FRBNY''). 
NSCC subsequently adopted the Clearing Agency Investment Policy, 
which permits NSCC to invest such proceeds in bank deposits either 
at the FRBNY or at an approved bank counterparty.
    \6\ Treasury is a part of the Chief Finance Office Organization 
of The Depository Trust & Clearing Corporation (``DTCC''), NSCC's 
parent company. DTCC operates on a shared services model with 
respect to the NSCC and its affiliates. Most corporate functions are 
established and managed on an enterprise-wide basis pursuant to 
intercompany agreements under which it is generally DTCC that 
provides a relevant service to NSCC and its affiliates.
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    Because the cash proceeds from the Prefunded Liquidity Program are 
one of NSCC's existing default liquidity resources, as described below, 
Treasury, in consultation with the Liquidity Product Risk Unit,\7\ 
makes decisions regarding the aggregate amount of Notes to be issued 
based on NSCC's projected liquidity needs.
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    \7\ The Liquidity Product Risk Unit is a part of the Group Chief 
Risk Office of the DTCC and is responsible for NSCC's liquidity risk 
management program. Id.
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    NSCC Liquidity Risk Management. NSCC measures and manages its 
liquidity risks and needs on a daily basis. In compliance with its 
regulatory requirements, NSCC seeks to maintain liquid resources in a 
sufficient amount to meet its settlement obligations under a wide range 
of foreseeable stress scenarios that includes, but is not limited to, 
the default of the affiliated family of Members that would generate the 
largest aggregate payment obligation for NSCC in extreme but plausible 
market conditions.\8\ NSCC developed the Prefunded Liquidity Program in 
order to strengthen its liquidity risk management by supplementing its 
other liquid resources with additional, prefunded, readily available 
liquid resources. NSCC's other liquid resources include (1) the cash in 
its Clearing Fund; \9\ (2) the cash that would be obtained by drawing 
on NSCC's committed 364-day credit facility with a consortium of banks 
(``Credit Facility''); \10\ and (3) additional cash deposits, known as 
``Supplemental Liquidity Deposits.'' \11\ By maintaining multiple 
sources for liquidity, NSCC does not have to rely on any one source to 
meet its liquidity needs.
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    \8\ Rule 17Ad-22(e)(7)(i).
    \9\ Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters), supra note 3.
    \10\ Securities Exchange Act Release No. 80605 (May 5, 2017), 82 
FR 21850 (May 10, 2017) (SR-DTC-2017-802, SR-NSCC-2017-802).
    \11\ Rule 4(A) (Supplemental Liquidity Deposits), supra note 3. 
The Supplemental Liquidity Deposits are designed to cover the 
heightened liquidity exposure arising around monthly option expiry 
periods and are required from those Members whose activity would 
pose the largest liquidity exposure to NSCC.
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    Proposed Increase to the Program. NSCC is proposing to increase the 
aggregate amount of Notes it would be authorized to issue and sell 
under the Prefunded Liquidity Program to $10 billion dollars. The 
proposal would enable NSCC to continue to maintain a sufficient amount 
of liquid resources in compliance with its regulatory requirements 
through the issuance of additional Notes in the event its liquidity 
needs increase. The proposal also would enable NSCC to meet its 
regulatory requirements with additional, prefunded, readily available 
liquid resources, which are available for NSCC to draw as needed to 
complete end-of-day settlement in the event of a Member default.
    Likewise, the proposal would provide NSCC with the flexibility to 
reduce its reliance on the Credit Facility as necessary. NSCC has 
observed varying levels of interest by the credit markets in recent 
years and cannot be certain that it will be able to continue to renew 
the Credit Facility at levels that would meet its projected liquidity 
needs in future years. Alternatively, the growth of the Prefunded 
Liquidity Program since its inception has been supported by a high, and 
growing, investor interest in high-rated Commercial Paper.\12\ Further, 
while the Credit Facility continues to be an important liquidity 
resource, it does not provide NSCC with prefunded, readily available 
liquidity, and incurs a greater cost to maintain than the Prefunded 
Liquidity Program. The Program would still be a more cost-effective 
liquidity resources, as compared to the Credit Facility, after the 
proposed increase. Therefore, the proposal would give NSCC the 
flexibility to better diversify its reliance on the various liquidity 
resources, including the Prefunded Liquidity Program, as it deems 
necessary to continue to meet its liquidity needs and in order to 
manage the associated costs.
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    \12\ In March 31, 2016, NSCC had issued approximately $1.4 
billion in Commercial Paper to 81 investors and, as of July 31, 
2017, this increased to approximately $3 billion in Commercial Paper 
outstanding to 177 investors. Further, as NSCC's investor base has 
grown, it has also diversified to include corporations, asset 
managers, governments, and financial institutions.
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    NSCC believes the proposal to add $5 billion to the authorized 
amount under the Program would provide it with adequate capacity to 
mitigate an unexpected increase in its liquidity needs and any 
potential decrease in the aggregate amount under its Credit Facility. 
NSCC does not anticipate issuing Notes up to the maximum authorized 
amount in the near term, and believes the proposal would allow it to 
grow the Program as necessary. NSCC is not proposing any other change 
to the Prefunded Liquidity Program, which will continue under the same 
terms and conditions as described in the 2015 Advance Notice.\13\
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    \13\ Supra note 4.
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Expected Effect on and Management of Risks
    As described above, NSCC believes the proposal to increase the 
authorized aggregate amount of Notes it can issue under the Prefunded 
Liquidity Program would enable it to better manage its liquidity risks 
by providing it with flexibility to increase its reliance on the 
Program, as necessary and appropriate, in meeting its liquidity needs 
and associated regulatory requirements.
    The Prefunded Liquidity Program, like other liquidity resources, 
involves certain risks that are standard in any commercial paper or 
extendible note program. Such risks were addressed in the 2015 Advance 
Notice and include the risk that NSCC does not have sufficient funds to 
repay issued Notes when they mature. By increasing the authorized 
aggregate amount of the Prefunded Liquidity Program, and thus 
potentially the aggregate amount of outstanding Notes that it will have 
to repay upon maturity, NSCC may be further exposed to this risk. 
However, as discussed in the 2015 Advance Notice, NSCC continues to 
believe this risk is remote, as the proceeds of the Program would be 
used only in the event of a Member default, and NSCC would replenish 
that cash, as it would replenish any of its liquidity resources that 
are used to facilitate settlement in the event of a Member default, 
with the proceeds of the close out of that defaulted Member's 
portfolio. This notwithstanding, in the event that proceeds from the 
close out are insufficient to fully repay a liquidity borrowing, then 
NSCC would look to its loss waterfall to repay any outstanding 
liquidity borrowings. NSCC has also further mitigated this risk by 
structuring the Prefunded Liquidity Program so that the maturity dates 
of the issued Notes are sufficiently staggered, which would provide 
NSCC with time to complete the close out of a defaulted Member's 
portfolio. As described above, NSCC would continue to follow its 
internal guidelines in the management of the Program to stagger the 
maturity dates of the issued Notes, and to extend the weighted average 
maturity of the issued Notes to maintain this staggered structure.
    A second risk is that NSCC may be unable to issue new Notes as 
issued Notes mature, or that there is a decrease in investor interest 
in commercial paper. As discussed in the 2015 Advance Notice, this risk 
is mitigated by the fact that NSCC maintains a number of different 
liquidity resources, described above, and would not depend

[[Page 178]]

on the Prefunded Liquidity Program as its sole source of liquidity.
    NSCC believes that the significant systemic risk mitigation 
benefits of providing NSCC with additional, prefunded liquid resources 
outweigh these risks.
Consistency With the Clearing Supervision Act
    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, its stated purpose is instructive: 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.\14\
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    \14\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \15\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities, 
like NSCC, and financial institutions engaged in designated activities 
for which the Commission is the supervisory agency or the appropriate 
financial regulator. Section 805(b) of the Clearing Supervision Act 
\16\ states that the objectives and principles for the risk management 
standards prescribed under Section 805(a) shall be to, among other 
things, promote robust risk management, promote safety and soundness, 
reduce systemic risks, and support the stability of the broader 
financial system.
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    \15\ 12 U.S.C. 5464(a)(2).
    \16\ 12 U.S.C. 5464(b).
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    The overall impact of the proposal is to reduce the liquidity risks 
associated with NSCC's operation as a central counterparty by providing 
it with additional, prefunded liquidity to complete end-of-day 
settlement in the event of a Member default. By reducing NSCC's 
liquidity risks, the proposal would promote its robust risk management. 
Given its important role in mitigating risks faced by its Members and 
the financial markets, a reduction in NSCC's liquidity risk would also 
reduce systemic risk, and would promote the safety, soundness and 
stability in the broader financial system. Therefore, NSCC believes the 
proposal is consistent with Section 805(b) of the Clearing Supervision 
Act.\17\
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    \17\ Id.
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    NSCC also believes that the proposal is consistent with the 
requirements of the Act, and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, NSCC 
believes the proposal is consistent with Rule 17Ad-22(e)(7)(ii) under 
the Act.\18\
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    \18\ 17 CFR 240.17Ad-22(e)(7)(ii).
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    Rule 17Ad-22(e)(7)(ii) under the Act requires that a covered 
clearing agency hold qualifying liquid resources sufficient to meet the 
minimum liquidity resource requirement under Rule 17Ad-22(e)(7)(i) in 
each relevant currency for which the covered clearing agency has 
payment obligations owed to clearing members.\19\ Rule 17Ad-22(a)(14) 
under the Act defines ``qualifying liquidity resources,'' in part, as 
cash held either at the central bank of issue or at creditworthy 
commercial banks.\20\
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    \19\ Id.
    \20\ 17 CFR 240.17Ad-22(a)(14).
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    The proceeds of the Program are cash held at either the FRBNY or a 
bank counterparty that has been approved pursuant to the Clearing 
Agency Investment Policy, and, as such, are considered ``qualifying 
liquid resources'' under Rule 17Ad-22(a)(14).\21\ These proceeds are 
available for NSCC to draw as needed to complete end-of-day settlement 
in the event of the default of a Member, and, as such, are one of 
NSCC's liquidity resources that it maintains in order to meet its 
settlement obligations under a wide range of foreseeable stress 
scenarios that includes, but is not limited to, the default of the 
affiliated family of Members that would generate the largest aggregate 
payment obligation for NSCC in extreme but plausible market conditions, 
in compliance with NSCC's requirement under Rule 17Ad-22(e)(7)(i). The 
proposal to increase the authorized amount of Notes NSCC may issue 
under the Program would enable NSCC to increase the amount of 
qualifying liquid resources it holds for these purposes. Therefore, the 
proposal would enable NSCC to continue to meet its requirements under 
Rule 17Ad-22(e)(7)(ii) in the event its liquidity needs increase.\22\
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    \21\ Id.
    \22\ Id.
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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. The clearing agency 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 the clearing agency with prompt written notice 
of the extension. A 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 the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    The clearing agency shall post notice on its website of proposed 
changes that are implemented.

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 [email protected]. Please include 
File Number SR-NSCC-2017-807 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-2017-807. 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 website (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 website viewing and printing in the 
Commission's Public

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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 website (http://dtcc.com/legal/sec-rule-filings.aspx). All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NSCC-2017-807 
and should be submitted on or before January 17, 2018.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017-28221 Filed 12-29-17; 8:45 am]
 BILLING CODE 8011-01-P


