[Federal Register Volume 85, Number 1 (Thursday, January 2, 2020)]
[Notices]
[Pages 149-154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28276]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87858; File No. SR-NSCC-2019-004]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Enhance 
National Securities Clearing Corporation's Haircut-Based Volatility 
Charge Applicable to Municipal Bonds

December 26, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 150]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 13, 2019, 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.\3\ 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.
    \3\ On December 13, 2019, NSCC filed this proposed rule change 
as an advance notice (SR-NSCC-2019-801) with the Commission 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, 12 U.S.C. 5465(e)(1), and 
Rule 19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy 
of the advance notice is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to NSCC's Rules & 
Procedures (``Rules'') \4\ in order to enhance NSCC's haircut-based 
volatility charge applicable to municipal bonds (the ``Bond Haircut''). 
References to the Bond Haircut in this document refer only to that 
charge as applied to municipal bonds. The proposed changes are 
described in greater detail below.
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at http://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
    NSCC is proposing a number of enhancements to NSCC's Bond Haircut, 
as described in greater detail below.
The Required Fund Deposit and the Bond Haircut
    As part of its market risk management strategy, NSCC manages its 
credit exposure to Members by determining the appropriate Required Fund 
Deposit for each Member and monitoring its sufficiency, as provided for 
in the Rules.\5\ The Required Fund Deposit serves as each Member's 
margin. The objective of a Member's Required Fund Deposit is to 
mitigate potential losses to NSCC associated with liquidation of the 
Member's portfolio in the event NSCC ceases to act for that Member 
(hereinafter referred to as a ``default'').\6\ The aggregate of all 
Members' Required Fund Deposits, together with certain other deposits 
required under the Rules, constitute the Clearing Fund of NSCC, which 
it would access should a defaulting Member's own Required Fund Deposit 
be insufficient to satisfy losses to NSCC caused by the liquidation of 
that Member's portfolio.
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    \5\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters) of the Rules (``Procedure XV''), supra 
note 4. NSCC's market risk management strategy is designed to comply 
with Rule 17Ad-22(e)(4) under the Act, where these risks are 
referred to as ``credit risks.'' 17 CFR 240.17Ad-22(e)(4).
    \6\ The Rules identify when NSCC may cease to act for a Member 
and the types of actions NSCC may take. For example, NSCC may 
suspend a firm's membership with NSCC or prohibit or limit a 
Member's access to NSCC's services in the event that Member defaults 
on a financial or other obligation to NSCC. See Rule 46 
(Restrictions on Access to Services) of the Rules, supra note 4.
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    Pursuant to the Rules, each Member's Required Fund Deposit amount 
consists of a number of applicable components, each of which is 
calculated to address specific risks faced by NSCC, as identified 
within Procedure XV.\7\ Generally, the largest component of Members' 
Required Fund Deposits is the volatility component. The volatility 
component is designed to calculate the amount of money that could be 
lost on a portfolio over a given period of time assumed necessary to 
liquidate the portfolio, within a 99% confidence level.
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    \7\ Procedure XV, supra note 4.
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    NSCC has two methodologies for calculating the volatility 
component. For the majority of Net Unsettled Positions,\8\ NSCC 
calculates the volatility component as the greater of (1) the larger of 
two separate calculations that utilize a parametric Value at Risk 
(``VaR'') model, (2) a gap risk measure calculation based on the 
largest non-index position in a portfolio that exceeds a concentration 
threshold, and (3) a portfolio margin floor calculation based on the 
market values of the long and short positions in the portfolio (``VaR 
Charge'').\9\ Pursuant to Sections I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of 
Procedure XV, certain positions in certain classes of securities, 
including municipal bonds, are excluded from the calculation of the VaR 
Charge and are instead charged a haircut-based volatility component 
that is calculated by multiplying the absolute value of such positions 
by a percentage designated by NSCC which shall not be less than 2%.\10\
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    \8\ ``Net Unsettled Positions'' and ``Net Balance Order 
Unsettled Positions'' refer to net positions that have not yet 
passed their settlement date, or did not settle on their settlement 
date, and are referred to collectively in this filing as Net 
Unsettled Positions. NSCC does not take into account any offsets, 
such as inventory held at other clearing agencies, when determining 
Net Unsettled Positions for the purpose of calculating the 
volatility component. See Procedure XV, supra note 4.
    \9\ Sections I(A)(1)(a)(i) and I(A)(2)(a)(i) of Procedure XV, 
supra note 4.
    \10\ Sections I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of Procedure XV, 
supra note 4.
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Existing Municipal Bond Haircut Methodology
    The existing methodology for calculating the Bond Haircut is 
described in Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of 
Procedure XV.\11\ In order to determine the current Bond Haircut, 
municipal bonds are categorized into tenor-based groups (i.e., based on 
remaining time to maturity) and separately categorized by municipal 
sector. Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of Procedure 
XV provide that NSCC shall establish a percentage applicable to each 
tenor-based group and pursuant to those sections NSCC has established a 
percentage (which is not less than 2%) for each tenor-based group which 
is used to calculate the haircut-based charge applicable to that 
group.\12\ For municipal bonds rated higher than BBB+, NSCC has 
established a tenor-based haircut for each tenor-based group. For 
example, a municipal bond rated above BBB+ with 3 years to maturity and 
$10MM short position, will be subject to the 2-5 years tenor-based 
group haircut (5%) which will be applied to the absolute market value 
of the positions resulting in $500K haircut-based charge.
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    \11\ Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of 
Procedure XV, supra note 4.
    \12\ Id.
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    Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of Procedure XV 
provide that NSCC shall assign each municipal sector a risk factor.\13\ 
For municipal bonds rated lower than a pre-determined threshold, which 
shall be no lower than BBB+, and non-rated municipal bonds, NSCC has 
established a percentage based on a sector-based risk factor which is 
also applied to the tenor-based haircut. For example, a municipal bond 
in the healthcare sector,

[[Page 151]]

rated BBB+ or lower with 3 years to maturity and $10MM short position, 
will be subject to the 2-5 years tenor-based group haircut (5%) 
multiplied by the sector-based factor (1.2), resulting in 6% haircut-
based charge of $600K. This additional sector-based risk factor is 
added because variable risk factors exist between municipal sectors 
based on the various industries in which the bonds are issued and the 
source of repayment for the bonds. For instance, general obligation 
bonds are typically backed by the taxing power of their issuer and 
repaid from general taxes whereas transportation or healthcare-related 
bonds may be repaid from funds from a specific project based on the 
revenues of the project. Such risk factor is based on the sector 
index's spread to a benchmark index.\14\ NSCC uses a vendor to match 
bonds to particular sectors. If a municipal bond does not fit within 
any particular sector, the highest sector-based risk factor is applied 
to such municipal bond. Currently, the highest sector-based risk factor 
is 2.6 used for bonds in the housing sector.
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    \13\ Id.
    \14\ The ``spread'' is the difference in the yield curve of the 
sector index to the yield curve of a benchmark index which is 
indicative of the added risk presented by the sector.
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Enhancements to Municipal Bond Haircut Methodology
    NSCC regularly assesses its market and liquidity risks, as such 
risks are related to its margining methodologies, to evaluate whether 
margin levels are commensurate with the particular risk attributes of 
each relevant product, portfolio, and market. In connection with such 
regular reviews, NSCC has determined based on impact studies that, 
under current market conditions, the current margin levels with respect 
to municipal bonds using the current methodology exceed the levels 
necessary to offset the risks with respect to these securities. Based 
on impact studies, NSCC has determined that changes to its current 
methodology for municipal bonds would result in margin levels that are 
lower and more commensurate with the risk attributes of those 
securities. In particular, as described below, NSCC is proposing to 
replace the municipal sector-based risk factor for lower rated 
municipal bonds with a percentage derived using the historical returns 
of applicable benchmark indices.
    NSCC is proposing the following enhancements to the methodology 
used for calculating the Bond Haircut.
    First, NSCC is proposing to re-calibrate the Bond Haircut not less 
frequently than annually. Sections I(A)(1)(a)(iii)(B) and 
I(A)(2)(a)(iii)(B) of Procedure XV currently provide that each 
municipal sector is assigned a risk factor no less frequently than 
annually.\15\ As discussed above and below, the enhanced methodology 
for calculating Bond Haircuts would no longer include the straight risk 
factor by sector. The re-calibration of the Bond Haircut not less 
frequently than annually would replace the assignment of a straight 
risk factor no less frequently than annually. NSCC believes that the 
periodic re-calibration would help ensure that NSCC is reviewing the 
Bond Haircut with enough regularity to ensure that the margin levels 
are commensurate with the particular risk attributes of municipal 
bonds.
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    \15\ Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of 
Procedure XV, supra note 4.
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    While the proposed rule change would provide that NSCC would re-
calibrate not less frequently than annually, NSCC would initially re-
calibrate the Bond Haircut on a quarterly basis. NSCC could change how 
often it recalibrates from time to time based on its regular review of 
margining methodologies; provided, that it would recalibrate not less 
frequently than annually pursuant to the proposed rule change. Changes 
to the frequency of calibration would be subject to NSCC's risk 
management practices which would require, among other things, approval 
by the DTCC Model Risk Governance Committee (``MRGC'').\16\
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    \16\ See Securities Exchange Act Release No. 81485 (August 25, 
2017), 82 FR 41433 (August 31, 2017) (File No. SR-NSCC-2017-008) 
(describes the adoption of the Clearing Agency Model Risk Management 
Framework (``Model Risk Management Framework'') of NSCC which sets 
forth the model risk management practices of NSCC) and Securities 
Exchange Act Release No. 84458 (October 19, 2018), 83 FR 53925 
(October 25, 2018) (File No. SR-NSCC-2018-009) (amends the Model 
Risk Management Framework). The Model Risk Management Framework 
describes the model management practices adopted by NSCC, which have 
been designed to assist NSCC in identifying, measuring, monitoring, 
and managing the risks associated with the design, development, 
implementation, use, and validation of ``models'' which would 
include the methodology for the Bond Haircut. Id.
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    Second, municipal bonds would be grouped into tenor-based groups 
and by credit rating, and municipal bonds that are rated BBB+ or lower, 
or that are not rated, would also be separately categorized by 
municipal sector. NSCC would then establish a percentage haircut for 
each group based on the (1) the historical returns of applicable 
benchmark indices, such as tenor-based indices (i.e., based on time to 
maturity), municipal bond sector-based indices, and high-yield indices; 
(2) a pre-determined look-back period, which shall not be shorter than 
10 years; and (3) a pre-determined calibration percentile, which shall 
not be less than 99%.
    For municipal bonds that are rated higher than BBB+, NSCC is 
proposing to use a tenor-based index (i.e., based on time to maturity) 
as the applicable benchmark index. While the proposed rule change would 
provide that NSCC would base such percentage for bonds that are rated 
higher than BBB+ on historical returns of applicable benchmark indices, 
such as tenor-based indices (i.e., based on time to maturity), 
municipal bond sector-based indices, and high-yield indices; NSCC would 
initially base the percentage derived from a benchmark municipal tenor-
based index over a 3-day price return from the index. NSCC could change 
which applicable benchmark indices it uses and the applicable period 
for the price return used in the calculation from time to time based on 
its regular review of margining methodologies. Changes to the frequency 
of calibration would be subject to NSCC's risk management practices 
which would require, among other things, approval by the MRGC.\17\
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    \17\ See note 16.
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    For municipal bonds that are rated BBB+ or lower, or are not rated, 
NSCC is proposing to use a percentage derived from the maximum of the 
applicable tenor-based index, municipal bond sector-based indices and a 
high-yield index. Rather than multiply the tenor-based haircut by a 
straight risk factor for each municipal sector, as is done under the 
current methodology, the Bond Haircut for these lower rated or non-
rated municipal bonds would be determined by using the maximum percent 
derived from either the applicable tenor-based index, the municipal 
bond sector-based indices or a high yield index. The enhancement would 
account for risks represented by the tenor, sector and high-yield 
characteristics that may be presented by these municipal bonds by using 
the maximum percent that is derived from either a tenor-based index, 
sector-based indices or a high yield index, rather than addressing 
these risks by multiplying the percent derived from a tenor-based index 
by a straight sector-based risk factor. Based on analysis of the impact 
studies, NSCC believes that the use of a risk factor based on the 
tenor-based index, municipal bond sector-based indices and a high-yield 
index would result in lower margins with respect to these securities 
that are sufficient to offset the risks with respect to these 
securities.
    While the proposed rule change would provide that NSCC would base

[[Page 152]]

such percentage on historical returns of applicable benchmark indices, 
such as tenor-based indices (i.e., based on time to maturity), 
municipal bond sector-based indices, and high-yield indices; NSCC would 
initially base the percentage derived from a tenor-based index, 
municipal bond sector-based indices and a high-yield index over a 3-day 
price return from the indices. NSCC could change which applicable 
benchmark indices it uses and the applicable period for the price 
return used in the calculation from time to time based on its regular 
review of margining methodologies in accordance with its risk 
management practices which would require, among other things, approval 
by the MRGC.\18\
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    \18\ See note 16.
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    In extraordinary circumstances, a certain municipality or issuer 
may present unique risks beyond the calibrated tenor, sector and high-
yield factors. For example, the market price risk for issues of a 
municipality facing technical default following a natural disaster may 
not be fully captured due to the liquidity profile of municipal 
securities. Therefore, NSCC would reserve the right to apply the 
highest haircut of all municipal bonds to a specific issuer in such 
instances. NSCC would apply the highest haircut in accordance with its 
risk management practices, including approval by an officer of NSCC in 
the risk management department, following a review of the circumstances 
facing the municipality and a finding that the market price movement 
raises risks that are not accounted for by the Bond Haircut 
methodology.
    Finally, the recalibration of the Bond Haircut would apply a pre-
determined look-back period. NSCC would initially apply a look-back 
period of a 10-year rolling window plus a one calendar year ``worst 
case scenario'' stress period. NSCC believes this look-back period is 
appropriate because it would capture relevant data and is adequate to 
cover enough market activity, while not diluting the ``tail'' with an 
abundance of data.\19\
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    \19\ NSCC believes that a 10-year window with a one-year stress 
period is typically long enough to capture at least two recent 
market cycles. NSCC believes that data over a longer period will 
``flatten'' out the results because recent volatile periods will be 
offset by non-volatile periods, making the more recent volatility 
appear less significant.
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    While the proposed rule change would provide that NSCC would apply 
a pre-determined look-back period, which shall not be shorter than 10 
years, NSCC would initially apply a look-back period of a 10-year 
rolling window plus a one calendar year ``worst case scenario'' stress 
period. NSCC could change the look-back period from time to time based 
on its regular review of margining methodologies in accordance with its 
risk management practices which would require, among other things, 
approval by the MRGC.\20\
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    \20\ See note 16.
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Proposed Rule Changes to Procedure XV
    In order to implement the proposed enhancements to the Bond Haircut 
methodology described above, Sections I(A)(1)(a)(iii)(B) and 
I(A)(2)(a)(iii)(B) of Procedure XV would be revised to provide that: 
(i) Municipal bonds would be grouped by both ``remaining time to 
maturity'' and credit rating, and municipal bonds that are BBB+ or 
lower, or that are not rated, would be separately categorized by 
municipal sector, (ii) NSCC would establish the Bond Haircut 
percentages no less frequently than annually, (iii) the Bond Haircut 
percentage to be applied to municipal bonds would apply to each 
grouping of municipal bonds and (iv) the Bond Haircut percentage to be 
applied to municipal bonds would be based on (1) the historical returns 
of applicable benchmark indices, such as tenor-based indices (i.e., 
based on time to maturity), municipal bond sector-based indices, and 
high-yield indices; (2) a pre-determined look-back period; and (3) a 
pre-determined calibration percentile, which shall not be less than 
99%. In addition, Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of 
Procedure XV would be revised to remove the references to the municipal 
sector factor and the current application of the municipal sector 
factor in the last four sentences in Sections I(A)(1)(a)(iii)(B) and 
I(A)(2)(a)(iii)(B) of Procedure XV. A sentence would also be added to 
Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of Procedure XV to 
provide that in extraordinary circumstances where NSCC determines that 
a certain municipality or issuer of municipal bonds presents unique 
risks that are not captured by the grouping set forth in those 
subsections, NSCC may, in its discretion, apply the highest percentage 
being applied to any municipal bond group pursuant to those subsections 
to municipal bonds issued by such municipality or issuer.
2. Statutory Basis
    NSCC believes that the proposed changes described above are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a registered clearing agency. In 
particular, NSCC believes that the proposed changes are consistent with 
Section 17A(b)(3)(F) of the Act,\21\ and Rules 17Ad-22(e)(4)(i), 
(e)(6)(i) and (e)(6)(v), each promulgated under the Act,\22\ for the 
reasons described below.
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    \21\ 15 U.S.C. 78q-1(b)(3)(F).
    \22\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(6)(v).
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    Section 17A(b)(3)(F) of the Act \23\ requires that the Rules be 
designed to, among other things, assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible. NSCC believes the proposed changes are 
designed to assure the safeguarding of securities and funds which are 
in its custody or control or for which it is responsible because they 
are designed to enable NSCC to more accurately calculate the necessary 
margin relating to Net Unsettled Positions in municipal bonds while 
continuing to limit its exposure to Members in the event of a Member 
default.
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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    NSCC believes that the proposed changes to (i) re-calibrate the 
Bond Haircut no less frequently than annually, (ii) apply a risk factor 
based on multiple benchmark indices for lower rated or non-rated 
municipal bonds rather than a straight sector-based risk factor, (iii) 
calibrate the percent to a pre-determined percentile that would not be 
less than 99% level and (iv) apply a pre-determined look-back period, 
would help ensure that the margin levels with respect to municipal 
bonds would be commensurate with the particular risk attributes of 
municipal bonds. Backtesting results conducted by NSCC have shown that 
the current methodology for calculating the Bond Haircut, using a 
straight municipal sector factor by sector, at times, results in 
coverage of 100%. NSCC has determined based on impact studies that, 
under current market conditions, the current margin levels with respect 
to municipal bonds using the current methodology exceed the levels 
necessary to offset the risks with respect to these securities. 
Backtesting results conducted by NSCC indicated that using the highest 
percentage from applicable benchmark indices in the enhanced 
methodology rather than the straight municipal sector factor as in the 
current methodology would result in the desired margin coverages to 
offset risk while reducing the average Required Fund Deposit for 
Members. In addition, by reserving the right to apply the highest risk 
factor in certain circumstances, NSCC would be protected from 
extraordinary circumstances where NSCC determines that the percentage 
to be applied to a

[[Page 153]]

particular grouping of municipal bonds does not fully capture the risks 
represented by that municipality or issuer. In this way, the haircut-
based volatility charge for Net Unsettled Positions in municipal bonds 
would be calculated to help enable NSCC to collect margin at levels 
that better reflect the risk presented by these Net Unsettled Positions 
to help NSCC limit its exposure to Members.
    The Clearing Fund is composed of Members' Required Fund Deposits 
that include the volatility component and is a key tool that NSCC uses 
to mitigate potential losses to NSCC associated with liquidating a 
Member's portfolio in the event of Member default. Therefore, NSCC 
believes that each of the proposed changes listed above would help 
enable NSCC to more accurately calculate the necessary margin relating 
to Net Unsettled Positions in municipal bonds while continuing to limit 
its exposure to Members such that, in the event of Member default, 
NSCC's operations would not be disrupted and non-defaulting Members 
would not be exposed to losses they cannot anticipate or control. In 
this way, the proposed rules are designed to assure the safeguarding of 
securities and funds which are in the custody or control of NSCC or for 
which it is responsible and therefore consistent with Section 
17A(b)(3)(F) of the Act.\24\
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    \24\ Id.
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    Rule 17Ad-22(e)(4)(i) under the Act \25\ 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.
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    \25\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above, NSCC believes that the proposed changes would 
help enable it to better identify, measure, monitor, and, through the 
collection of Members' Required Fund Deposits, manage its credit 
exposures to Members by maintaining sufficient resources to cover those 
credit exposures fully with a high degree of confidence. More 
specifically, the proposed changes to the methodology for Bond Haircuts 
to apply a risk factor based on multiple benchmark indices for lower 
rated or non-rated municipal bonds rather than a straight risk factor 
by sector would help allow NSCC to more accurately identify the credit 
exposure relating to Net Unsettled Positions in municipal bonds for 
purposes of applying an appropriate margin charge and to help provide 
NSCC with a more effective measure of the risks that may be presented 
to NSCC by positions in the securities. The proposed changes to (i) re-
calibrate the Bond Haircut no less frequently than annually, (ii) 
calibrate the percent to a pre-determined percentile that would not be 
less than 99% level, and (iii) apply a pre-determined look-back period 
would enable NSCC to apply the proposed enhanced methodology discussed 
above and to better monitor its credit exposure relating to Net 
Unsettled Positions in municipal bonds. By providing that NSCC would be 
required to re-calibrate the Bond Haircut no less frequently than 
annually, the proposed rule change would help ensure that NSCC would 
periodically review the Bond Haircut to ensure that it continued to 
accurately reflect the risks presented by municipal bonds. Finally, by 
reserving the right to apply the highest group factor in extraordinary 
circumstances, NSCC would help protect itself in circumstances where 
the assigned factor does not adequately account for risks presented by 
extraordinary events, such as natural disasters.
    Based on backtesting results in which the proposed methodology was 
applied, NSCC believes that the proposed changes would help allow it to 
collect Required Fund Deposits that are more accurate to offset the 
risks presented by municipal bonds and provide a better method of 
managing risks presented by those securities. Therefore, NSCC believes 
that the proposed changes would help enhance NSCC's ability to 
effectively identify, measure, monitor and manage its credit exposures 
and would help enhance its ability to maintain sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence. As such, NSCC believes the proposed changes 
are consistent with Rule 17Ad-22(e)(4)(i) under the Act.\26\
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    \26\ Id.
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    Rule 17Ad-22(e)(6)(i) under the Act \27\ 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.
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    \27\ 17 CFR 240.17Ad-22(e)(6)(i).
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    The Required Fund Deposit is made up of risk-based components (as 
margin) that are calculated and assessed daily to limit NSCC's credit 
exposures to Members. NSCC is proposing changes that are designed to 
more effectively address risk characteristics of Net Unsettled 
Positions in municipal bonds by capturing risks more accurately by 
applying multiple indices. Rather than multiply the tenor-based haircut 
for lower rated bonds by a straight risk factor for each municipal 
sector, the Bond Haircut for lower rated or non-rated municipal bonds 
would be determined by using the maximum percent derived from either 
the tenor-based index, the municipal bond sector-based indices or a 
high yield index. Based on backtesting results, NSCC believes that 
deriving the percent using a maximum of the indices more accurately 
captures the risk of such municipal bonds that may be presented by 
tenor, sector and the higher yield of these securities compared to the 
present use of a straight sector-based risk factor. Based on such 
results, NSCC believes that these changes would help enable NSCC to 
produce margin levels that are more commensurate with the particular 
risk attributes of these securities. These proposed changes are 
designed to assist NSCC in maintaining a risk-based margin system that 
considers, and produces margin levels commensurate with, the risks and 
particular attributes of portfolios relating to municipal bonds, 
including risks and attributes related to tenor, municipal sector and 
higher yields. Therefore, NSCC believes the proposed change is 
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\28\
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    \28\ Id.
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    Rule 17Ad-22(e)(6)(v) under the Act \29\ 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, uses an appropriate method for measuring credit exposure that 
accounts for relevant product risk factors and portfolio effects across 
products. NSCC is proposing to enhance the Bond Haircut because NSCC 
believes that the proposed methodology would help provide NSCC with a 
more effective measure of the credit exposure presented by municipal 
bonds. In particular, as described above, NSCC believes that the 
enhancements would result in a more effective measure of the tenor, 
sector and higher yield risks presented by municipal bonds that are 
rated BBB+ or lower, or are not rated.

[[Page 154]]

Therefore, NSCC believes the proposed change is consistent with Rule 
17Ad-22(e)(6)(v) under the Act.\30\
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    \29\ 17 CFR 240.17Ad-22(e)(6)(v).
    \30\ 17 CFR 240.17Ad-22(e)(6)(v).
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed changes to the Bond Haircut 
would have an adverse impact, or impose any burden, on competition. 
Based on impact studies, NSCC believes that the proposed changes to the 
Bond Haircut would result in a reduction in the Required Fund Deposit 
with respect to every Member with Net Unsettled Positions in municipal 
bonds. NSCC believes that this impact would promote competition for 
Members that have Net Unsettled Positions in municipal bonds by 
reducing the amount of the Required Fund Deposit for such Members while 
continuing to appropriately limit NSCC's exposure to Members in the 
event of a Member default. In addition, NSCC does not believe that the 
proposed rule changes would disproportionally impact any Members.

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

    NSCC has not received or solicited any written comments relating to 
this proposal. 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.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

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-2019-004 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-2019-004. 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 website (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 website 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 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-2019-004 and should be submitted on 
or before January 23, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-28276 Filed 12-31-19; 8:45 am]
 BILLING CODE 8011-01-P


