[Federal Register Volume 85, Number 126 (Tuesday, June 30, 2020)]
[Notices]
[Pages 39244-39245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14010]



[[Page 39244]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89145; File No. SR-NSCC-2020-003]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Enhance National 
Securities Clearing Corporation's Haircut-Based Volatility Charge 
Applicable to Illiquid Securities and UITs and Make Certain Other 
Changes to Procedure XV

June 24, 2020.

I. Introduction

    On March 16, 2020, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2020-003 (``Proposed Rule 
Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule 
Change was published for comment in the Federal Register on March 31, 
2020.\3\ The Commission has received comment letters on the Proposed 
Rule Change.\4\ On May 21, 2020, pursuant to Section 19(b)(2) of the 
Act,\5\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\6\ This order 
institutes proceedings, pursuant to Section 19(b)(2)(B) of the Act,\7\ 
to determine whether to approve or disapprove the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 88474 (March 25, 2020), 
85 FR 17910 (March 31, 2020) (SR-NSCC-2020-003) (``Notice''). NSCC 
also filed the proposal contained in the Proposed Rule Change as 
advance notice SR-FICC-2020-802 (``Advance Notice'') with the 
Commission pursuant to Section 806(e)(1) of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act''). 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i). 
Notice of filing of the Advance Notice was published for comment in 
the Federal Register on April 15, 2020. Securities Exchange Act 
Release No. 88615 (April 9, 2020), 85 FR 21037 (April 15, 2020) (SR-
NSCC-2020-802). The proposal contained in the Proposed Rule Change 
and the Advance Notice shall not take effect until all regulatory 
actions required with respect to the proposal are completed.
    \4\ Letter from Christopher R. Doubek, CEO, Alpine Securities 
Corporation (April 21, 2020); Letter from John Busacca, Founder, 
Securities Industry Professional Association (April 23, 2020); 
Letter from Charles F. Lek, Lek Securities Corporation (April 30, 
2020); Letter from James C. Snow, President/CCO, Wilson-Davis & Co., 
Inc., all available at https://www.sec.gov/comments/sr-nscc-2020-003/srnscc2020003.htm.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 88885 (May 15, 2020), 85 
FR 31007 (May 21, 2020) (SR-NSCC-2020-003).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

    As described in the Notice,\8\ NSCC proposes to (1) revise the 
definition of Illiquid Security, (2) apply a haircut-based volatility 
charge specifically applicable to Illiquid Securities and unit 
investment trusts (``UITs''), (3) eliminate the current Illiquid 
Charge, and (4) make other confirming changes.
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    \8\ The description of the Proposed Rule Change is based on the 
statements prepared by NSCC in the Notice. See Notice, supra note 3. 
Capitalized terms used herein and not otherwise defined herein are 
defined in NSCC's Rules & Procedures, available at www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
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A. Proposed Definition of Illiquid Security

    NSCC's proposed definition of an Illiquid Security includes three 
categories of securities. The first category of the proposed definition 
of an Illiquid Security would include any security that is not listed 
on a specified securities exchange. For purposes of this definition, 
NSCC's Rules would define a ``specified securities exchange'' as a 
national securities exchange that has established listing services and 
is covered by industry pricing and data vendors. The second category of 
the proposed definition of an Illiquid Security would include any 
security that (1) is listed on a specified securities exchange, (2) 
either (i) has a market capitalization that is considered by NSCC to be 
a micro-capitalization as of the last business day or the prior month, 
or (ii) is an American depositary receipt, and (3) the median of its 
calculated illiquidity ratio of the prior six months exceeds certain 
threshold that would be determined by NSCC pursuant to certain 
criteria. The third category of the proposed definition of an Illiquid 
Security would include any security that is listed on a specified 
securities exchange and, as determined by NSCC on a monthly basis, has 
fewer than 31 business days of trading history over the past 153 
business days on such exchange.

B. Proposed Haircut-Based Volatility Charge Specifically Applicable to 
Illiquid Securities and UITs

    First, NSCC proposes to expressly exclude Illiquid Securities from 
calculating the volatility component of a Required Fund Deposit using a 
parametric Value at Risk (``VaR'') model and instead apply a haircut-
based volatility charge specifically to Illiquid Securities. To 
determine the appropriate volatility charge, NSCC would group Illiquid 
Securities by price level. The haircut percentage applicable to each 
group of Illiquid Securities would be determined at least annually. The 
haircut percentage would be the highest of the following percentages: 
(1) 10%, (2) a percent benchmarked to be sufficient to cover the 99.5th 
percentile of the historical 3-day return of each group of Illiquid 
Securities in each Member's portfolio, and (3) a percent benchmarked to 
be sufficient to cover the 99th percentile of the historical 3-day 
return of each group in each Member's portfolio after incorporating a 
fixed transaction cost equal to one-half of the estimated bid-ask 
spread. The look-back period for purposes of calibrating the applicable 
percentage would be no less than five years.
    Second, NSCC proposes to expressly exclude UITs from calculating 
the volatility component of the Required Fund Deposit using a VaR 
model, and instead apply a haircut-based volatility charge specifically 
applicable to UITs. NSCC would review the haircut percentage used in 
this calculation at least annually. The haircut percentage applicable 
to UITs would be the highest of (1) 2%, and (2) the 99.5th percentile 
of the historical 3-day returns for the group of UITs within each 
Member's portfolio using a look-back period of no less than 5 years.

C. Proposed Elimination of the Illiquid Charge

    NSCC proposes to eliminate the existing Illiquid Charge (and the 
corresponding definition of Illiquid Position), which may be imposed as 
an additional charge in the volatility component of a Required Fund 
Deposit that is applied to Illiquid Securities as securities that are 
less amenable to statistical analysis.

D. Proposed Conforming Changes

    NSCC proposes to make two conforming changes to harmonize the Rules 
in light of the proposed amendments discussed above. First, the 
proposal would exclude municipal and corporate bonds that are less 
amenable to statistical analysis or amenable to statistical analysis 
only in a complex manner from the VaR Charge. Second, NSCC proposes to 
revise the Rules to clarify its current practice (i.e., that only long 
positions in Family-Issued Securities are excluded from the VaR 
Charge), and that short positions in Family-Issued Securities would be 
subject to the haircut-based volatility

[[Page 39245]]

charge because they would meet the proposed definition of Illiquid 
Securities.

III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \9\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
and provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \9\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\10\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Change's consistency with Section 17A of the Act,\11\ and the 
rules thereunder, including the following provisions:
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    \10\ Id.
    \11\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\12\ which requires, among 
other things, that the rules of a clearing agency must be designed to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible and to protect investors and the public interest; and
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(4)(i) under the Act,\13\ which requires a 
covered clearing agency 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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    \13\ 17 CFR 240.17Ad-22(e)(4)(i).
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     Rule 17Ad-22(e)(23)(ii) under the Act,\14\ which requires 
a covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide 
sufficient information to enable participants to identify and evaluate 
the risks, fees, and other material costs they incur by participating 
in the covered clearing agency.
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    \14\ 17 CFR 240.17Ad-22(e)(23)(ii).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Act,\15\ 
Rule 17Ad-22(e)(4)(i) under the Act,\16\ Rule 17Ad-22(e)(23)(ii) under 
the Act,\17\ or any other provision of the Act, or the rules and 
regulations thereunder. Although there do not appear to be any issues 
relevant to approval or disapproval that would be facilitated by an 
oral presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4(g) under the Act,\18\ any request for 
an opportunity to make an oral presentation.\19\
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ 17 CFR 240.17Ad-22(e)(4)(i).
    \17\ 17 CFR 240.17Ad-23(e)(23)(ii).
    \18\ 17 CFR 240.19b-4(g).
    \19\ Section 19(b)(2) of the Act grants to the Commission 
flexibility to determine what type of proceeding--either oral or 
notice and opportunity for written comments--is appropriate for 
consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by July 21, 2020. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
August 4, 2020.
    The Commission asks that commenters address the sufficiency of 
NSCC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice,\20\ in addition to any other comments they may 
wish to submit about the Proposed Rule Change.
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    \20\ See Notice, supra note 3.
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    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-2020-003 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2020-003. 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-2020-003 and should be submitted on 
or before July 21, 2020. Rebuttal comments should be submitted by 
August 4, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(31).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14010 Filed 6-29-20; 8:45 am]
BILLING CODE 8011-01-P


