[Federal Register Volume 83, Number 42 (Friday, March 2, 2018)]
[Notices]
[Pages 9035-9039]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04237]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82780; File No. SR-NSCC-2017-808]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of No Objection To Advance Notice Filing, as 
Modified by Amendment No. 1, To Enhance the Calculation of the 
Volatility Component of the Clearing Fund Formula That Utilizes a 
Parametric Value-at-Risk Model and Eliminate the Market Maker 
Domination Charge

February 26, 2018.
    National Securities Clearing Corporation (``NSCC'') filed with the 
U.S. Securities and Exchange Commission (``Commission'') on December 
28, 2017 the advance notice SR-NSCC-2017-808 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) \2\ under the Securities Exchange Act of 1934, as 
amended (``Exchange Act''). On January 10, 2018, NSCC filed Amendment 
No. 1 to the advance notice.\3\ The advance notice, as modified by 
Amendment No. 1 (hereinafter, the ``Advance Notice'') was published for 
comment in the Federal Register on February 8, 2018.\4\ The Commission 
did not receive any comments on the Advance Notice. This publication 
serves as notice that the Commission does not object to the changes set 
forth in 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\ In Amendment No. 1 to the advance notice, NSCC amended and 
replaced in its entirety the originally filed confidential Exhibit 
3a with a new confidential Exhibit 3a in order to remove references 
to a practice that was not intended for consideration as part of the 
filing.
    \4\ Securities Exchange Act Release No. 82631 (February 5, 
2018), 83 FR 5658 (February 8, 2017) (SR-NSCC-2017-808) 
(``Notice''). NSCC also filed a related 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. The proposed rule change was 
published in the Federal Register on January 19, 2018. Securities 
Exchange Act Release No. 82494 (January 12, 2018), 83 FR 2828 
(January 19, 2018) (SR-NSCC-2017-020). The Commission did not 
receive any comments on that proposal.
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I. Description of the Advance Notice

    The Advance Notice consists of changes to NSCC's Rules & Procedures 
(``Rules'') \5\ that would enhance NSCC's method for calculating the 
daily margin requirement for each NSCC member (``Member'').\6\ 
Specifically, NSCC proposes to (1) add three new ways to calculate the 
volatility component of its Members' margin requirements, and (2) 
eliminate an outdated component of the margin calculation, as described 
more fully below.\7\ NSCC states that the new volatility component 
calculations would enable NSCC to mitigate the credit risks presented 
by Member portfolios in a broader range of scenarios and market 
conditions than NSCC's current volatility component calculation.\8\
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    \5\ NSCC's Rules, available at http://dtcc.com/~/media/Files/
Downloads/legal/rules/nscc_rules.pdf.
    \6\ Notice, 83 FR at 5659.
    \7\ Id.
    \8\ Id.
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    A key tool that NSCC uses to manage its credit exposures to Members 
is the daily calculation and collection of margin from each Member 
(``Required Deposit'').\9\ NSCC collects Required Deposits from Members 
to mitigate NSCC's potential losses associated with the liquidation of 
a Member's portfolio should the Member default.\10\ The aggregate of 
all Members' Required Deposits constitutes NSCC's Clearing Fund, which 
NSCC can access should a defaulting Member's own Required Deposit be 
insufficient to satisfy NSCC's losses caused by the liquidation of the 
Member's portfolio.\11\
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    \9\ Id.
    \10\ Id.
    \11\ Id.
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A. Evenly-Weighted Volatility Estimation

    Each Member's Required Deposit consists of several components.\12\ 
Generally, the largest component of a Member's Required Deposit is the 
volatility component, which is designed to capture the market price 
risk associated with each Member's portfolio at a 99th percentile level 
of confidence.\13\ NSCC currently calculates the volatility component 
using a parametric Value-at-Risk (``VaR'') model.\14\ NSCC's current 
VaR calculation places more emphasis on recent market observations 
(such as recent price history) for the purpose of estimating current 
market price volatility levels, based on the assumption that the most 
recent price history is more relevant and accurate for measuring 
current market price volatility levels (referred to as an 
``exponentially-weighted volatility estimation'').\15\ However, 
volatility in the equity markets often rapidly reverts to more commonly 
observed levels, followed by a subsequent spike.\16\ While a VaR 
calculation that applies exclusively an exponentially-weighted 
volatility estimation can capture sudden increases in volatility, it 
may result in a swift decline in margin that does not adequately 
capture the risks related to a rapid decrease in market price 
volatility levels.\17\ NSCC proposes to mitigate this shortcoming by 
adding another method for computing the VaR calculation that does not 
diminish the value of older market observations.\18\ Specifically, NSCC 
proposes to add a VaR calculation that gives equal weight to all 
historical volatility observations during a specified look-back period 
(referred to by NSCC as an ``evenly-weighted volatility 
estimation''),\19\ which could

[[Page 9036]]

result in margin requirement amounts during non-volatile periods 
greater than margin requirement amounts based upon the exponentially-
weighted volatility estimation.\20\ Under the proposal, NSCC would 
calculate both the exponentially-weighted volatility estimation and the 
evenly-weighted volatility estimation, and the greater result would 
represent the ``Core Parametric Estimation.'' \21\
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    \12\ See Procedure XV (Clearing Fund Formula and Other Matters) 
of the Rules, supra note 5.
    \13\ Notice, 83 FR at 5659-60.
    \14\ Notice, 83 FR at 5660.
    \15\ Id.
    \16\ Id.
    \17\ Id.
    \18\ Id.
    \19\ Id.
    \20\ Id.
    \21\ Notice, 83 FR at 5661.
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B. Gap Risk Measure

    In addition to the Core Parametric Estimation, NSCC proposes to add 
a second method for determining the volatility component of a Member's 
Required Deposit.\22\ This second method, referred to as the Gap Risk 
Measure, would help address risks that are unique to Member portfolios 
that hold a concentrated position in a specific security.\23\ More 
specifically, when a Member's portfolio holds a concentrated position 
in a specific security, such that the position represents a significant 
percentage of the entire portfolio's value, the portfolio may be more 
susceptible to risks associated with issuer-specific events affecting 
the price of the concentrated security.\24\ Such events include earning 
reports, management changes, merger announcements, insolvency, or other 
unexpected issuer-specific events (collectively, ``Gap Risk 
Events'').\25\
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    \22\ Id.
    \23\ Id.
    \24\ Id.
    \25\ Id.
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    NSCC has observed that portfolios with a concentration level of 
more than 30 percent in a specific security tend to have backtesting 
coverage below the 99 percent confidence level.\26\ To mitigate the 
concentration risk posed by such portfolios, NSCC proposes the Gap Risk 
Measure, which would apply to all individual equities in a Member's 
portfolio, but only when the Member holds a position in a security that 
meets a 30 percent concentration threshold relative to the remainder of 
the portfolio.\27\
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    \26\ Id.
    \27\ Id.
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    NSCC also has observed that exchange-traded products (``ETPs'') 
that track to a broad market index are generally not susceptible to Gap 
Risk Events.\28\ Accordingly, NSCC would not apply the Gap Risk Measure 
to positions in such index-based ETPs, even if the 30 percent 
concentration threshold is met.\29\ However, non-index-based ETPs and 
index-based ETPs that track a narrow market index are susceptible to 
Gap Risk Events, and would, therefore, be subject to the Gap Risk 
Measure, provided that the 30 percent concentration threshold is 
met.\30\
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    \28\ Id.
    \29\ Id.
    \30\ Id. NSCC states that it would use a third-party market 
provider to identify index-based ETPs. Id. The third-party market 
provider would identify index-based ETPs as those with criteria that 
require the portfolio returns to track to a broad market index. Id. 
ETPs that do not meet this criteria would not be considered index-
based ETPs and, therefore, would be included in the Gap Risk Measure 
calculation. Id.
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    When applicable, NSCC would calculate the Gap Risk Measure by 
multiplying the gross market value of the largest (non-index) position 
in the portfolio by a percent of not less than 10 percent.\31\
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    \31\ Id. NSCC would determine such percent empirically as no 
less than the larger of the 1st and 99th percentiles of three-day 
returns of a set of CUSIPs that are subject to the volatility 
component, giving equal rank to each to determine which has the 
highest movement over that three-day period. Id. NSCC would use a 
look-back period of not less than ten years that includes a one-year 
stress period. Id. If the one-year stress period overlaps with the 
look-back period, only the non-overlapping period would be combined 
with the look-back period. Id. The result would then be rounded up 
to the nearest whole percentage. Id.
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C. Portfolio Margin Floor

    In addition to the Core Parametric Estimation and the Gap Risk 
Measure, NSCC proposes to add a third method for determining the 
volatility component of a Member's Required Deposit.\32\ This third 
method, referred to as the Portfolio Margin Floor, would help address 
risks that may not be adequately accounted for by the Core Parametric 
Estimation or the Gap Risk Measure.\33\ For example, a volatility 
component based solely on a parametric VaR model calculation may prove 
inadequate where there is low market price volatility and the portfolio 
holds either large gross market values or large net directional market 
values.\34\ In such cases, the model may not collect sufficient margin, 
which could hinder NSCC's ability to effectively liquidate or hedge the 
Member's portfolio in three business days.\35\
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    \32\ Notice, 83 FR at 5661.
    \33\ Id.
    \34\ Notice, 83 FR at 5662.
    \35\ Id.
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    NSCC proposes the Portfolio Margin Floor to operate as a floor to 
(i.e., minimum amount of) a Member's volatility component.\36\ 
Specifically, the Portfolio Margin Floor would be based on the balance 
and direction of the positions in the Member's portfolio and would be 
designed to be proportional to the market value of the portfolio.\37\
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    \36\ Id.
    \37\ Id.
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    The Portfolio Margin Floor would be the sum of two separate 
calculations, both of which would measure the market value of the 
portfolio based on the direction of net positions in the portfolio.\38\ 
First, NSCC would calculate the net directional market value of the 
portfolio by calculating the absolute difference between the market 
value of the long positions and shorts positions in the portfolio,\39\ 
then multiplying that amount by a percentage.\40\ Second, NSCC would 
calculate the balanced market value of the portfolio by taking the 
lowest market value of either the long or short positions in the 
portfolio,\41\ then multiplying that value by a percentage.\42\ The 
combined results of these two calculations would constitute the final 
Portfolio Margin Floor amount.\43\
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    \38\ Id.
    \39\ For example, if the market value of the long positions is 
$100,000, and the market value of the short positions is $200,000, 
the net directional market value of the portfolio would be $100,000. 
Id.
    \40\ Id. NSCC would determine the applicable percentage by 
examining the annual historical volatility levels of benchmark 
indices over a historical look-back period. Id.
    \41\ For example, if the market value of the long positions is 
$100,000, and the market value of the short positions is $110,000, 
the balanced market value of the portfolio would be $100,000. Id.
    \42\ Id. NSCC would determine the applicable percentage to be an 
amount that covers the transaction costs and other relevant risks 
associated with the positions in the portfolio. Id.
    \43\ Id.
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    Finally, in order to choose the amount to be charged as the 
volatility component of a Member's Required Deposit, NSCC would compare 
the amounts calculated by the Portfolio Margin Floor, the Gap Risk 
Measure (if applicable), and the Core Parametric Estimation. NSCC then 
would use the highest of those three calculations as the volatility 
component of the Member's Required Deposit.\44\
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    \44\ Id.
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D. Elimination of the Market Maker Domination Component

    NSCC proposes to eliminate the Market Maker Domination Component 
(``MMD Charge'') from its Clearing Fund formula.\45\ The MMD Charge is 
an existing component of the Clearing Fund formula calculated for 
Members that are Market Makers and Members that clear for Market 
Makers.\46\ The MMD Charge was developed to address the risks presented 
by concentrated positions (of the overall unsettled long position in 
the security) held by Market Makers.\47\ More specifically, the charge

[[Page 9037]]

is designed to address securities that are susceptible to marketability 
and liquidation impairment because of the relative size of the 
positions that NSCC would have to liquidate or hedge in the case of a 
Market Maker default.\48\
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    \45\ Id.
    \46\ Id; see also Procedure XV, Section I(A)(1)(d) of the Rules, 
supra note 5.
    \47\ Notice, 83 FR at 5662.
    \48\ Id.
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    Under the current Rules, NSCC may impose the MMD Charge if the 
Market Maker (either the Member or the correspondent of the Member) 
holds a position that is greater than 40 percent of the overall 
unsettled long position (i.e., the sum of each clearing broker's net 
long position) in a specific security.\49\ NSCC calculates the MMD 
Charge as the sum of each of the absolute values of the net positions 
in the relevant securities, less the reported amount of excess net 
capital for that Member.\50\
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    \49\ Id.
    \50\ Id. NSCC does not apply the excess net capital offset for 
Members with the weakest credit rating (i.e. 7) on the Credit Risk 
Rating Matrix. See Procedure XV, Sections I(A)(1)(d) and I(A)(2)(c) 
of the Rules, supra note 5.
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    NSCC states that since implementation of the MMD Charge, several 
developments in the U.S. equity markets (e.g., improved price 
transparency, access across exchange venues, and participation by 
market liquidity providers) have reduced the risks that the MMD Charge 
was designed to address.\51\ NSCC further states that the MMD Charge 
may not effectively address concentration risk because the MMD Charge 
(1) only applies to positions in certain securities, as described 
above, (2) does not address concentration risk presented by positions 
in securities that are not listed on NASDAQ or in securities traded by 
firms that are not Market Makers, and (3) does not account for 
concentration in market capitalization categories.\52\ NSCC states that 
the proposed Gap Risk Measure would provide better concentration risk 
coverage than the MMD Charge because the former would apply to all 
Members, whereas the latter only applies to Market Makers.\53\
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    \51\ Notice, 83 FR at 5662.
    \52\ Id.
    \53\ Id.
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II. Discussion and Commission Findings

    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.\54\
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    \54\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \55\ authorizes 
the Commission to prescribe regulations containing risk-management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency. Section 805(b) of the 
Clearing Supervision Act \56\ provides the following objectives and 
principles for the Commission's risk-management standards prescribed 
under Section 805(a):
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    \55\ 12 U.S.C. 5464(a)(2).
    \56\ 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.
    Section 805(c) of the Clearing Supervision Act provides, in 
addition, that the Commission's risk-management standards may address 
such areas as risk-management and default policies and procedures, 
among others areas.\57\
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    \57\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk-management standards under Section 
805(a)(2) of the Clearing Supervision Act \58\ and Section 17A of the 
Exchange Act (``Rule 17Ad-22'').\59\ Rule 17Ad-22 requires each covered 
clearing agency, among other things, 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.\60\ Therefore, it is 
appropriate for the Commission to review proposed changes in advance 
notices for consistency with the objectives and principles of the risk-
management standards described in Section 805(b) of the Clearing 
Supervision Act \61\ and against Rule 17Ad-22.\62\
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    \58\ 12 U.S.C. 5464(a)(2).
    \59\ 15 U.S.C. 78q-1.
    \60\ 17 CFR 240.17Ad-22.
    \61\ 12 U.S.C. 5464(b).
    \62\ 17 CFR 240.17Ad-22.
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the changes proposed in the Advance 
Notice are consistent with each of the objectives and principles 
described in Section 805(b) of the Act.\63\ Specifically, as discussed 
below, the Commission believes that the changes proposed in the Advance 
Notice are consistent with promoting robust risk management in the area 
of credit risk and promoting safety and soundness, which in turn, would 
help reduce systemic risk and support the stability of the broader 
financial system.
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    \63\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposed changes promote robust 
risk management by adding three new volatility component calculations 
that would better enable NSCC to mitigate the credit risks presented by 
Member portfolios in a broader range of scenarios and market conditions 
than NSCC's current volatility component calculation.
    First, as described above, NSCC currently calculates the volatility 
component of each Member's Required Deposit using a VaR calculation 
that relies exclusively on an exponentially-weighted volatility 
estimation. However, the current VaR calculation places more emphasis 
on recent market observations, which may result in a swift decline in 
margin that does not adequately capture the risks related to a rapid 
decrease in market price volatility levels. To address this 
shortcoming, NSCC proposes to (1) add a VaR calculation that relies on 
an evenly-weighted volatility estimation (i.e., that gives equal weight 
to all historical volatility observations during a specified look-back 
period), (2) compare the amounts of both VaR calculations (i.e., based 
on both evenly- and exponentially-weighted volatility estimations), and 
(3) use the greater amount as the Core Parametric Estimation. 
Accordingly, the Commission believes adding the VaR calculation based 
on an evenly-weighted volatility estimation would enable NSCC to more 
effectively limit its credit exposure to Members in market conditions 
that reflect a rapid decrease in market price volatility levels.
    Second, as described above, when a Member's portfolio holds a 
concentrated position in a specific security beyond a significant 
percentage of the entire portfolio's value, the portfolio may be more 
susceptible to Gap Risk Events. In such a scenario, NSCC's current 
volatility component calculation may result in inadequate margin 
coverage. To address this issue, NSCC has proposed the Gap Risk Measure 
as an alternative volatility component calculation. The Gap Risk 
Measure is designed to provide better margin coverage in such a 
scenario as it would apply to all individual equities (including non-
index-based and narrow-index-based ETPs, as described above) when a 
Member maintains a position in its portfolio that exceeds the 30 
percent

[[Page 9038]]

concentration threshold. Accordingly, the Commission believes adding 
the Gap Risk Measure would enable NSCC to more effectively limit its 
credit exposure to Members in certain scenarios in which a Member holds 
a security that meets the 30 percent concentration threshold relative 
to the remainder of its portfolio.
    Third, as described above, when a Member's portfolio holds either 
large gross market values or large net directional market values in a 
period of low market price volatility, NSCC's current volatility 
component calculation may not result in adequate margin, which could 
hinder NSCC's ability to effectively liquidate or hedge the Member's 
portfolio in the event of the Member's default. To address this 
concern, NSCC proposes the Portfolio Margin Floor, which would operate 
as a floor to (i.e., minimum amount of) the volatility component of a 
Member's Required Deposit. Accordingly, the Commission believes adding 
the Portfolio Margin Floor would enable NSCC to more effectively limit 
its credit exposure to Members in certain scenarios, such as when a 
Member's portfolio holds either large gross market values or large net 
directional market values and market prices exhibit low volatility.
    Finally, to help ensure that the amount of margin that NSCC 
collects as the volatility component of a Member's Required Deposit 
would help mitigate each of the specific concerns addressed by the Core 
Parametric Estimation, Gap Risk Measure, and Portfolio Margin Floor, 
NSCC would assess the largest amount of those three calculations as the 
volatility component of the Member's Required Deposit.
    In addition to the three proposed volatility component 
calculations, NSCC also proposes to eliminate the MMD Charge. As 
described above, NSCC has found the MMD Charge to be an inefficient and 
ineffective component of the Clearing Fund formula that may not 
accurately capture the credit risk presented by a Member's portfolio. 
More specifically, the charge does not cover a range of scenarios and 
market conditions that would be covered by the proposed Gap Risk 
Measure. Moreover, in contrast to the proposed Gap Risk Measure, the 
MMD Charge (1) only applies to positions in certain securities, (2) 
does not address concentration risk presented by positions in 
securities that are not listed on NASDAQ, (3) does not account for 
concentration in market capitalization categories, and (4) only applies 
to Market Makers. Accordingly, NSCC's proposal to eliminate the MMD 
Charge is designed to remove an obsolete component from the Clearing 
Fund formula.
    Taken together, each of the above described changes would enhance 
NSCC's current method for calculating each Member's volatility 
component, enabling NSCC to produce margin levels more commensurate 
with the risks associated with its Members' portfolios in a broader 
range of scenarios and market conditions, and, thus, more effectively 
cover its credit exposure to its Members. Therefore, the Commission 
believes the changes proposed in the Advance Notice are consistent with 
promoting robust risk management, consistent with Section 805(b) of the 
Clearing Supervision Act.\64\
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    \64\ Id.
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    The Commission also believes that the proposed changes would 
promote safety and soundness at NSCC, which, in turn, would help reduce 
systemic risk and support the stability of the broader financial 
system. As described above, the proposed changes are designed to better 
limit NSCC's credit exposure to Members in the event of a Member 
default. More specifically, the proposed VaR calculation based on an 
evenly-weighted volatility estimation would enable NSCC to better 
manage its credit exposure to Members in market conditions that reflect 
a rapid decrease in market price volatility levels. Meanwhile, the 
proposed Gap Risk Measure would enable NSCC to manage its credit 
exposure to Member portfolios that are more susceptible to Gap Risk 
Events. Finally, the proposed Portfolio Margin Floor would enable NSCC 
to better manage its credit exposure to Members in certain scenarios, 
such as low market price volatility when a Member's portfolio holds 
either large gross market values or large net directional market 
values.
    By better limiting credit exposure to its Members, NSCC's proposed 
changes are designed to help ensure that, in the event of a Member 
default, NSCC's operations would not be disrupted and non-defaulting 
Members would not be exposed to losses that they cannot anticipate or 
control. As such, the Commission finds that the proposed changes would 
promote safety and soundness, which in turn, would reduce systemic 
risks and support the stability of the broader financial system, 
consistent with Section 805(b) of the Clearing Supervision Act.\65\
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    \65\ Id.
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    Therefore, the Commission believes that the changes proposed in the 
Advance Notice are consistent with Section 805(b) of the Clearing 
Supervision Act.\66\
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    \66\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(i) of the Exchange Act

    The Commission believes that the changes proposed in the Advance 
Notice are consistent with Rule 17Ad-22(e)(4)(i) under the Exchange 
Act, which requires that NSCC 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 arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence.\67\
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    \67\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above, the Commission believes the proposed VaR 
calculation based on an evenly-weighted volatility estimation would 
enable NSCC to better manage its credit exposure to Members in market 
conditions that reflect a rapid decrease in market price volatility 
levels; the proposed Gap Risk Measure would enable NSCC to better 
manage its credit exposure to Member portfolios that are more 
susceptible to Gap Risk Events; and the proposed Portfolio Margin Floor 
would enable NSCC to better manage its credit exposure to Members in 
certain scenarios, such as when a Member's portfolio holds either large 
gross market values or large net directional market values and market 
prices exhibit low volatility. Furthermore, NSCC would assess a Member 
the largest of these three calculations as the Member's volatility 
component to its Required Deposit.
    Each of these proposed changes is designed to help NSCC more 
effectively identify, measure, monitor, and manage its credit exposures 
to its Members. In doing so, the proposed changes would enable NSCC to 
more accurately assess the volatility component of a Member's Required 
Deposit and, thus, help NSCC maintain sufficient financial resources to 
cover its credit exposure to each Member fully with a high degree of 
confidence. Therefore, the Commission finds that the changes proposed 
in the Advance Notice are consistent with Rule 17Ad-22(e)(4)(i) under 
the Exchange Act.\68\
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    \68\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i) and (v) of the Exchange Act

    The Commission believes that the changes proposed in the Advance

[[Page 9039]]

Notice are consistent with Rule 17Ad-22(e)(6)(i) under the Exchange 
Act, which requires that NSCC establish, implement, maintain and 
enforce written policies and procedures reasonably designed to cover 
its credit exposures to its participants 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.\69\ Furthermore, the Commission 
believes that the changes proposed in the Advance Notice are consistent 
with Rule 17Ad-22(e)(6)(v) under the Exchange Act, which requires that 
NSCC establish, implement, maintain and enforce written policies and 
procedures reasonably designed to use an appropriate method for 
measuring credit exposure that accounts for relevant product risk 
factors and portfolio effects across products.\70\
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    \69\ 17 CFR 240.17Ad-22(e)(6)(i).
    \70\ 17 CFR 240.17Ad-22(e)(6)(v).
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    As described above, the Commission believes the proposed VaR 
calculation based on an evenly-weighted volatility estimation would 
enable NSCC to better manage its credit exposure to Members in certain 
market conditions with a rapid decrease in market price volatility 
levels; the proposed Gap Risk Measure would enable NSCC to better 
manage its credit exposure to Member portfolios that are more 
susceptible to Gap Risk Events; and the proposed Portfolio Margin Floor 
would enable NSCC to better manage its credit exposure to Members in 
certain scenarios, such as low market price volatility when a Member's 
portfolio holds either large gross market values or large net 
directional market values and market prices exhibit low volatility. 
Moreover, NSCC would assess a Member the largest of these three 
calculations as the Member's volatility component to its Required 
Deposit.
    These three proposed volatility component calculations are designed 
to help improve NSCC's risk-based margin system by enabling NSCC to 
produce margin levels that are more commensurate with the risks and 
particular attributes of the relevant products, portfolios, and markets 
that NSCC serves. Additionally, as described above, the three proposed 
volatility component calculations are designed to use methods that are 
more appropriately tailored for measuring credit exposure that account 
for specific risk factors and portfolio effects. Therefore, the 
Commission finds that the changes proposed in the Advance Notice are 
consistent with Rules 17Ad-22(e)(6)(i) and (v) under the Exchange 
Act.\71\
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    \71\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\72\ that the Commission does not object to 
advance notice SR-NSCC-2017-808 and that NSCC is authorized to 
implement the proposed change as of the date of this notice or the date 
of an order by the Commission approving proposed rule change SR-NSCC-
2017-020 that reflects rule changes that are consistent with this 
Advance Notice, whichever is later.
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    \72\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2018-04237 Filed 3-1-18; 8:45 am]
BILLING CODE 8011-01-P


