[Federal Register Volume 88, Number 53 (Monday, March 20, 2023)]
[Notices]
[Pages 16681-16687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05447]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97129; File No. SR-NSCC-2022-009]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Adopt Intraday 
Volatility Charge and Eliminate Intraday Backtesting Charge

March 13, 2023.

I. Introduction

    On July 7, 2022, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2022-009 (the ``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 July 
20, 2022,\3\ and the Commission has received comments on the Proposed 
Rule Change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 95286 (July 14, 
2022), 87 FR 43355 (July 20, 2022) (File No. SR-NSCC-2022-009) 
(``Notice of Filing'').
    \4\ Comments are available at https://www.sec.gov/comments/sr-nscc-2022-009/srnscc2022009.htm.
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    On September 1, 2022, 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\ On October 14,

[[Page 16682]]

2022, the Commission instituted proceedings, pursuant to Section 
19(b)(2)(B) of the Act,\7\ to determine whether to approve or 
disapprove the Proposed Rule Change.\8\ On January 10, 2023, the 
Commission designated a longer period for Commission action on the 
proceedings to determine whether to approve or disapprove the Proposed 
Rule Change.\9\
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 95650 (Sept. 1, 2022), 
87 FR 55054 (Sept. 8, 2022) (File No. SR-NSCC-2022-009).
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ Securities Exchange Act Release No. 96088 (Oct. 14, 2022), 
87 FR 63845 (Oct. 20, 2022) (File No. SR-NSCC-2022-009).
    \9\ Securities Exchange Act Release No. 96621 (Jan. 10, 2023), 
88 FR 2688 (Jan. 17, 2023) (File No. SR-NSCC-2022-009).
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    For the reasons discussed below, the Commission is approving the 
Proposed Rule Change.\10\
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    \10\ Capitalized terms not defined herein are defined in NSCC's 
Rules & Procedures (``Rules''), available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
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II. Description of the Proposed Rule Change

    NSCC provides clearing, settlement, risk management, central 
counterparty services, and a guarantee of completion for virtually all 
broker-to-broker trades involving equity securities, corporate and 
municipal debt securities, and unit investment trust transactions in 
the U.S. markets. A key tool that NSCC uses to manage its credit 
exposure to its members is collecting an appropriate Required Fund 
Deposit (i.e., margin) from each member.\11\ A member's margin is 
designed to mitigate potential losses to NSCC associated with 
liquidation of the member's portfolio in the event of that member's 
default.\12\ The aggregate of all NSCC members' margin deposits 
(together with certain other deposits required under the Rules) 
constitutes NSCC's clearing fund, which NSCC would access should a 
member default and that member's margin, upon liquidation, be 
insufficient to satisfy NSCC's losses.\13\
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    \11\ See Rule 4 and Procedure XV of the Rules, supra note 10.
    \12\ Under NSCC's Rules, a default would generally be referred 
to as a ``cease to act'' and could encompass a number of 
circumstances, such as a member's failure to make a margin deposit 
in a timely fashion. See Rule 46, supra note 10.
    \13\ See id.
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    A member's margin consists of a number of applicable components, 
each of which addresses specific risks faced by NSCC.\14\ Each member's 
start of day required margin is calculated overnight, based on the 
member's prior end-of-day net unsettled positions, and notified to 
members early the following morning to be deposited by approximately 
10:00 a.m.\15\ In this Proposed Rule Change, NSCC would make two 
changes to its margin methodology.
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    \14\ See Procedure XV of the Rules, supra note 10.
    \15\ See Procedure XV, Sections II(B) of the Rules, supra note 
10. The Rules provide that required deposits to the clearing fund 
are due within one hour of demand, unless otherwise determined by 
NSCC.
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    First, NSCC would add an intraday volatility charge to its margin 
requirement, which would increase the margin it collects from members 
whose trading portfolios experience large and unexpected intraday 
volatility. NSCC performed an impact study with respect to this change 
that reviewed member positions at 4:00 p.m. between January 3, 2020 and 
May 28, 2021. The study showed that the proposal would have resulted in 
approximately eight intraday volatility charges collected on an average 
day during that time period, at an average of $31.6 million, ranging in 
size from $251,000 to $1.35 billion.\16\
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    \16\ See Notice of Filing, supra note 3, at 43360-61.
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    Second, NSCC would amend its margin requirement to eliminate the 
intraday backtesting charge because the charge relies upon an 
assumption that may lead to undercounting potential backtesting 
deficiencies.\17\ NSCC will retain the backtesting charge it collects 
as margin at the start of each business day.\18\ The proposed changes 
to its margin requirements are the result of NSCC's regular review of 
its margin methodology to evaluate whether margin levels are 
commensurate with the particular risk attributes of each relevant 
product, portfolio, and market.\19\ NSCC performed an impact analysis 
looking at both the proposal's impact on end of day backtesting and 
intraday backtesting between February 2021 and February 2022, during 
which time period NSCC collected a daily average of $30 million from 15 
members in intraday backtesting charges. Although NSCC would not have 
collected these amounts under the proposal, the study showed that the 
end of day backtesting would have remained above the 99% coverage 
target during that time period, and this aspect of the proposal would 
have had an immaterial impact on intraday backtesting results, causing 
backtesting to drop below the 99% coverage target slightly in only two 
instances.\20\
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    \17\ See id. at 43357.
    \18\ See Procedure XV, Section I.B(3) of the Rules, supra note 
10.
    \19\ See Notice of Filing, supra note 3, at 43357.
    \20\ See id. at 43361.
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A. Background Regarding Specific Aspects of NSCC's Margin Methodology

    Volatility Component: Generally, the largest portion of an NSCC 
member's margin is the volatility component. The volatility component 
is designed to reflect the amount of money that could be lost on a 
portfolio over a given period within a 99th percentile level of 
confidence. This component represents the amount assumed necessary for 
NSCC to absorb losses while liquidating the member's portfolio.
    NSCC's methodology for calculating the volatility component of a 
member's required margin depends on the type of security and whether 
the security has sufficient pricing or trading history for NSCC to 
robustly estimate the volatility component using statistical 
techniques. Generally, for most securities (that is, equity 
securities), NSCC calculates the volatility component using, among 
other things, a parametric Value at Risk (``VaR'') model, which results 
in a ``VaR Charge.'' \21\ In addition, for securities that do not have 
sufficient pricing or trading history to perform the statistical 
analysis employed in the VaR model, NSCC applies a haircut to calculate 
the volatility component, in lieu of the VaR-based calculation.\22\ The 
volatility component of a member's required margin is the sum of the 
VaR-based and the haircut-based calculations.
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    \21\ Specifically, NSCC calculates the VaR Charge as the 
greatest of (1) the larger of two separate calculations that utilize 
the VaR model, (2) a gap risk measure calculation based on the 
largest non-index position in a portfolio that exceeds a 
concentration threshold, which addresses concentration risk that can 
be present in a member's portfolio, or (3) a portfolio margin floor 
calculation based on the market values of the long and short 
positions in the portfolio, which addresses risks that might not be 
adequately addressed with the other volatility component 
calculations. See Procedure XV, Sections I(A)(1)(a)(i) and 
I(A)(2)(a)(i) of the Rules, supra note 10.
    \22\ Securities that are subject to the haircut-based 
calculation include unit investment trusts, corporate and municipal 
bonds and Illiquid Securities. See Rule 1 and Procedure XV, Sections 
I(A)(1)(a)(iii) and (2)(a)(iii) of the Rules, supra note 10.
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    Margin requirement differential (``MRD'') charge: NSCC may assess 
an MRD charge, which is designed to capture the unpredictability of a 
member's historical trading activity, as measured, in part, by the 
variability in a member's volatility charge over a 100-day lookback 
period.\23\
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    \23\ Specifically, MRD is calculated as the sum of an 
exponentially weighted moving average (``EWMA'') of positive day 
over day changes over a 100-day look back period in member's (1) 
mark-to-market charge and (2) volatility charge, times a multiplier 
calibrated based on backtesting results. See Procedure XV, Sections 
I(A)(1)(e) and (2)(d) of the Rules, supra note 10.
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    Backtesting charge: NSCC employs daily backtesting to determine the 
sufficiency of each member's margin, by simulating the liquidation 
gains or losses using the actual unsettled positions in the member's 
portfolio, and

[[Page 16683]]

the actual historical returns for each security held in the 
portfolio.\24\ A backtesting deficiency would result if the liquidation 
losses were greater than the member's margin. NSCC investigates the 
causes of any backtesting deficiencies, paying particular attention to 
members with backtesting deficiencies that bring the results for that 
member below the 99 percent confidence target (i.e., greater than two 
backtesting deficiency days in a rolling twelve-month period) to 
determine if there is an identifiable cause of repeat backtesting 
deficiencies.\25\ NSCC also evaluates whether multiple members may 
experience backtesting deficiencies for the same underlying reason.\26\
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    \24\ Backtesting is an ex-post comparison of actual outcomes 
with expected outcomes derived from the use of margin models. See 17 
CFR 240.17Ad-22(a)(1).
    \25\ See Notice of Filing, supra note 3, at 43356.
    \26\ See id.
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    Based on that daily testing, NSCC may assess a backtesting charge, 
which is designed to collect additional margin generally from any 
member whose 12-month trailing backtesting coverage falls below or 
risks falling below the 99 percent confidence level.\27\ Currently, 
this charge may be assessed on an intraday or regular basis.\28\ If 
assessed, a member's start-of-day backtesting charge is generally equal 
to that member's third largest deficiency,\29\ and a member's intraday 
backtesting charge is generally equal to that member's fifth largest 
deficiency, that occurred during the previous 12 months.\30\ NSCC 
calculates the backtesting charge monthly and, based on those 
calculations, may either continue to impose an existing backtesting 
charge, impose a new or remove an existing backtesting charge, or it 
may either increase or decrease a member's existing backtesting charge 
as necessary to maintain its target backtesting coverage.\31\
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    \27\ See Procedure XV, Section I(B)(3) of the Rules, supra note 
10. See also Securities Exchange Act Release No. 79167 (Oct. 26, 
2016), 81 FR 75883 (Nov. 1, 2016) (File Nos. SR-FICC-2016-006; SR-
NSCC-2016-004).
    \28\ See Procedure XV, Section I(B)(3) of the Rules, supra note 
10.
    \29\ See id.
    \30\ See id.
    \31\ See id.
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B. Proposed Intraday Volatility Charge

    NSCC proposes to implement an intraday volatility charge that would 
be part of its members' margin requirement to better address the 
volatility risks presented by members' intraday net unsettled positions 
between the collections of margin at the start of each business 
day.\32\ NSCC states that through its regular monitoring, it has 
occasionally observed significant intraday changes to market price 
volatility and significant changes to the size and composition of 
members' portfolios of net unsettled positions that could cause the 
amount collected as the volatility charge at the start of that business 
day (``start of day volatility charge'') to no longer be sufficient to 
mitigate the volatility risks that such positions present to NSCC.\33\ 
The proposed intraday volatility charge would be designed to address 
this risk.
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    \32\ NSCC states that it did not believe that an intraday 
volatility charge was necessary in 2017, when it accelerated the 
time of its trade guarantee (from midnight of one day after trade 
date to either the point of trade comparison and validation, for 
bilateral submissions, or the point of trade validation, for locked-
in submissions), because it did not believe that such a charge was 
necessary to address the risks presented by the accelerated trade 
guarantee. See Notice of Filing, supra note 3, at 43357. See also 
Securities Exchange Act Release No. 79598 (Dec. 19, 2016), 81 FR 
94462 (Dec. 23, 2016) (File No. SR-NSCC-2016-005); Addendum K of the 
Rules, supra note 10.
    \33\ See Notice of Filing, supra note 3, at 43357.
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    Application of the intraday volatility charge: An intraday 
volatility charge generally would apply when the difference between a 
member's start of day volatility charge and a calculation of the 
volatility charge based on that member's intraday net unsettled 
positions exceeds 100 percent, and when the amount of the charge is 
greater than $250,000.
    NSCC states that, on days when there is increased volatility in the 
market, it would provide notice to its members that an intraday 
volatility charge may be collected. If NSCC determines to collect an 
intraday volatility charge, NSCC would issue a notice by electronic 
mail to those members who are subject to that charge, who would be able 
to view the amount to be collected in NSCC's clearing fund management 
system.\34\ This notification and collection process would be identical 
to the current process that is followed for the notification and 
collection of the intraday mark-to-market charges.\35\ Members who 
receive that notice would be required to fund the amount of the 
intraday volatility charge within one hour of that notice, pursuant to 
Section II(B) of Procedure XV of the Rules.\36\
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    \34\ See id. at 43359.
    \35\ See id.
    \36\ See Procedure XV, Section II(B) of the Rules, supra note 
10.
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    Calculation of the intraday volatility charge: The amount of 
intraday volatility charge would be equal to the difference between the 
start of day volatility charge and the intraday calculation of that 
volatility charge, reduced by the volatility portion of the MRD charge 
collected from that member at the start of the business day.\37\ NSCC 
states that, although the MRD charge is intended to capture the same 
type of risk (i.e., variability in the volatility charge), it believes 
the proposed intraday volatility charge would provide it with a better 
measure of the significant intraday volatility swings in a member's 
positions, which may be inconsistent with a member's historical trading 
activity.\38\ NSCC states, therefore, it would not be necessary for 
NSCC to collect as part of the intraday volatility charge any amounts 
that it has already collected as the volatility portion of the MRD 
charge for that business day.\39\
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    \37\ To avoid doublecounting the risks captured by any intraday 
mark-to-market charges NSCC may assess (see Procedure XV, Section 
I(B)(5) of the Rules, supra note 10), NSCC would use the same end of 
day price returns as used in the start of day volatility charge.
    \38\ See Notice of Filing, supra note 3, at 43358.
    \39\ See id.
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    When calculating the intraday volatility charge, NSCC proposes to 
adjust the net unsettled positions by excluding any position for which 
shares have either been delivered to the CNS System which is used by 
NSCC to account for and settle transactions or received by the member 
from the CNS System to satisfy all or any portion of that position. 
NSCC states it believes that, for purposes of this calculation, it 
would be appropriate to assume the positions for which the shares have 
been delivered and received would settle at the end of the day, so that 
the calculation would be more effectively driven by any significant 
intraday changes to the volatility risks presented by members' adjusted 
intraday net unsettled positions.\40\
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    \40\ See id.
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    Thresholds in Applying the Charge: As described above, NSCC 
proposes to only assess an intraday volatility charge if two thresholds 
are met (1) when the difference between the two calculations of the 
volatility charge exceeds 100 percent, and (2) the amount that would be 
calculated as an intraday volatility charge is greater than $250,000. 
NSCC states it believes the 100 percent threshold is appropriate 
because, in normal market conditions, intraday changes in volatility 
that are lower than this threshold are more likely due to normal market 
fluctuations, and NSCC believes that, based on past observations, only 
an increase that is larger than 100 percent of the start of day 
volatility charge and that is greater

[[Page 16684]]

than $250,000 would require mitigation through the intraday volatility 
charge.\41\
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    \41\ NSCC states it believes amounts below this threshold, which 
is the minimum required deposit to the clearing fund, would be 
immaterial to address any increased risk. See id.
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    NSCC proposes to retain the discretion within its Rules to lower 
this threshold if it determines that a reduction would be appropriate 
to mitigate risks to NSCC, for example, during volatile market 
conditions or market events that cause increases in trading volume, or 
when NSCC believes a lower threshold is appropriate to mitigate risks 
presented by members whose portfolios may present relatively greater 
risks to NSCC on an overnight basis.\42\ In circumstances when NSCC 
determines it is appropriate to reduce the threshold, the reduced 
threshold would apply to all members. NSCC states that this discretion 
would allow NSCC to collect an intraday volatility charge earlier in 
light of increased levels of volatility risks, and in these 
circumstances, a lower threshold would allow NSCC to more proactively 
preserve the coverage of its required fund deposit.\43\
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    \42\ See id.
    \43\ See id. As part of the Proposed Rule Change, NSCC filed 
Exhibit 3c--NSCC Market Risk Management Procedures (marked excerpt), 
which includes NSCC's internal criteria that would be applied to 
determine whether to adjust the threshold. Pursuant to 17 CFR 
240.24b-2, NSCC requested confidential treatment of Exhibit 3c. 
Based on its review of those materials, the Commission understands 
that NSCC would provide notice to its members of any changes to the 
threshold.
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    Exceptions to Collecting an Intraday Volatility Charge: NSCC 
proposes two exceptions to collecting an intraday volatility charge 
from a particular member or members, which are instances where (a) 
trades submitted later in the day would offset trades submitted earlier 
in the day, such that the thresholds would not have been met if such 
activity had been submitted earlier in the day, or (b) the threshold 
was met due to the submission of an erroneous trade that can be 
corrected.
    NSCC monitors volatility in 15-minute increments throughout the 
business day.\44\ When the threshold is exceeded during normal market 
conditions earlier in the trading day, NSCC states it would typically 
not collect an intraday volatility charge until later in the day when 
members have had an opportunity to submit trading activity that would 
be expected to offset trades submitted earlier in the day that caused 
the thresholds to be met,\45\ or a system issue or other error could 
cause a delay in the submission of activity.\46\ NSCC states that it 
believes an intraday volatility charge would not be necessary in these 
circumstances because the risk presented by the temporary increase in 
volatility would be expected to be mitigated by other clearing activity 
or corrected submissions later in the day.\47\
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    \44\ See Notice of Filing, supra note 3, at 43357.
    \45\ NSCC further states that off-setting trading activity may 
be submitted to NSCC later in the day in connection with a member's 
business model or trading practices. See id. at 43359.
    \46\ See id.
    \47\ See id.
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    In determining whether to collect an intraday volatility charge, 
after the occurrence of a threshold trigger, NSCC would utilize the 
same escalation procedures that are currently in place when making 
similar determinations with respect to its current authority to impose 
intraday mark-to-market charges. Specifically, NSCC would utilize a 
predetermined escalation matrix that identifies the level of the 
required approver within the NSCC Market Risk group based on the amount 
of the calculated intraday volatility charge that would be 
collected.\48\ A decision to collect the charge would be made based on 
documentation provided to the required approver regarding the 
circumstances of the calculated charge.\49\
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    \48\ As part of the Proposed Rule Change, NSCC filed Exhibit 
3c--NSCC Market Risk Management Procedures (marked excerpt), which 
includes NSCC's internal escalation procedures that will be 
applicable to a determination to waive a member's intraday 
volatility charge or to alter the applicable threshold. Pursuant to 
17 CFR 240.24b-2, NSCC requested confidential treatment of Exhibit 
3c.
    \49\ See Notice of Filing, supra note 3, at 43359.
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    Application to Positions in Securities Financing Transactions: NSCC 
has established a clearing service for securities financing 
transactions to make central clearing available at NSCC for equity 
securities financing transactions (``SFTs'').\50\ NSCC proposes to 
include the intraday volatility charge among the margin charges that 
are applicable to SFT positions cleared through NSCC.
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    \50\ See Rule 56, supra note 10.
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C. Proposed Elimination of the Intraday Backtesting Charge

    NSCC is also proposing to eliminate the intraday backtesting 
charge. NSCC states that, in connection with recent regulatory 
feedback, it has determined that the current methodology for 
calculating the intraday backtesting charge relies upon an assumption 
that NSCC would cease to act for a member that has paid all of its 
intraday margin requirements, when it is possible that would not be the 
case.\51\ That is, NSCC could cease to act for a member that has not 
paid all of its intraday margin requirements, meaning that the member 
would have provided less margin to NSCC and may therefore present 
additional losses. As a result, this methodology may underestimate a 
member's backtesting losses and undercount potential backtesting 
deficiencies, whereas a calculation that disregards intraday margin 
collections would penalize members for making intraday margin deposits 
and be considered double margining.\52\
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    \51\ See Notice of Filing, supra note 3, at 43360.
    \52\ See id.
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    More specifically, if NSCC collects margin from a member intraday, 
but does not include that amount as part of the member's margin when 
backtesting, resulting in a backtesting deficiency and a subsequent 
intraday backtesting charge, that member would have covered its risk to 
NSCC twice--first as intraday margin collected from that member and 
second as an intraday backtesting charge.\53\ Therefore, given these 
deficiencies and in light of the proposed intraday volatility charge, 
NSCC proposes to eliminate the intraday backtesting charge.
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    \53\ See id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \54\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the Proposed Rule 
Change, the Commission finds that the Proposed Rule Change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to NSCC. In particular, the 
Commission finds that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) \55\ of the Act and Rules 17Ad-22(e)(4)(i), 
(e)(6)(i), and (e)(23)(ii) thereunder.\56\
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    \54\ 15 U.S.C. 78s(b)(2)(C).
    \55\ 15 U.S.C. 78q-1(b)(3)(F).
    \56\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(23)(ii).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \57\ requires that the rules of a 
clearing agency, such as NSCC, be designed to, among other things, 
promote the prompt and accurate clearance and settlement of securities 
transactions and assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is

[[Page 16685]]

responsible.\58\ The Commission believes that the proposal is 
consistent with Section 17A(b)(3)(F) of the Act for the reasons stated 
below.
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    \57\ 15 U.S.C. 78q-1(b)(3)(F).
    \58\ Id.
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    As described above in Section II.B, NSCC proposes to add an 
intraday volatility charge to its margin requirements that NSCC may 
collect when certain thresholds are met. As discussed in more detail in 
Section III.C infra, the Commission believes that this proposed change 
to NSCC's margin methodology would help NSCC ensure that it collects 
sufficient margin to cover its credit exposure to its members in times 
of intraday market volatility.
    Moreover, as described above in Section II.C, NSCC proposes to 
eliminate the intraday backtesting charge because it is based on an 
unreasonable assumption and is not necessary, in light of the proposed 
intraday volatility charge, for NSCC to address its intraday market 
risk exposures and backtesting coverage metrics. NSCC provided 
information regarding the impact of the proposed intraday backtesting 
charge elimination on its backtesting coverage.\59\ The results of the 
analysis showed that, despite not collecting intraday backtesting 
charges, NSCC's end of day backtesting would have remained above the 99 
percent coverage target during that time period, and that this aspect 
of the proposal would have had an immaterial impact on intraday 
backtesting results, causing backtesting to drop below the 99 percent 
coverage target slightly in only two instances.\60\ The Commission has 
reviewed NSCC's analysis and agrees that its results indicate that 
NSCC's proposal to eliminate the intraday backtesting charge would not 
materially impact NSCC's margin coverage, and because the proposed 
intraday volatility charge would, when applicable, allow NSCC to 
collect additional amounts which would more accurately reflect the 
intraday changes to market volatility or the size of a member's 
portfolio.
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    \59\ As part of the Proposed Rule Change, NSCC filed Exhibit 
3b--NSCC Intraday Backtesting Charge Impact Study Data, comparing 
the current and proposed margin collections. Pursuant to 17 CFR 
240.24b-2, NSCC requested confidential treatment of Exhibit 3b. The 
confidential information provided more granular support for this 
analysis.
    \60\ See id.
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    With respect to both aspects of this proposal, the Commission 
believes that, by allowing NSCC to collect sufficient margin, the 
proposal should help ensure that, in the event of a member default, 
NSCC's operation of its critical clearance and settlement services 
would not be disrupted because of insufficient financial resources. 
Accordingly, the Commission finds that NSCC's proposal should help NSCC 
to continue providing prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act.
    Moreover, as described in Section II above, NSCC would access the 
mutualized clearing fund should a defaulted member's own margin be 
insufficient to satisfy losses to NSCC caused by the liquidation of 
that member's portfolio. Because NSCC's proposal to adopt an intraday 
volatility charge should help ensure that NSCC has collected sufficient 
margin from members, the proposed changes would also help minimize the 
likelihood that NSCC would have to access the clearing fund, thereby 
limiting non-defaulting members' exposure to mutualized losses. The 
Commission believes that by helping to limit the exposure of NSCC's 
non-defaulting members to mutualized losses, the proposed changes 
should help NSCC assure the safeguarding of securities and funds which 
are in its custody or control, consistent with Section 17A(b)(3)(F) of 
the Act.\61\
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    \61\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)(i) Under the Act

    Rule 17Ad-22(e)(4)(i) under the Act requires that each covered 
clearing agency, such as 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.\62\ The Commission believes that the 
proposal is consistent with Rule 17Ad-22(e)(4)(i) under the Act for the 
reasons stated below.\63\
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    \62\ 17 CFR 240.17Ad-22(e)(4)(i).
    \63\ Id.
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    The proposed change to adopt an intraday volatility charge would 
allow NSCC to better manage its credit exposures to members by 
maintaining sufficient resources to cover those credit exposures fully 
with a high degree of confidence. Specifically, and as discussed 
further in Section III.C infra, the proposed intraday volatility charge 
would allow NSCC to collect additional margin on an intraday basis to 
help NSCC effectively mitigate the risks related to intraday increases 
in volatility and would address the increased risks NSCC may face 
related to liquidating a member's portfolio following that member's 
default.
    Moreover, the proposed change to eliminate the intraday backtesting 
charge set forth in Section II.C would eliminate a charge that is 
currently calculated based on an unreasonable assumption and is not 
necessary for NSCC to address its intraday market risk exposures and 
backtesting coverage metrics. As discussed above,\64\ the Commission 
has reviewed and analyzed the results of NSCC's backtesting analysis 
and believes that this proposal would allow NSCC to continue to collect 
margin to meet its coverage requirements.
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    \64\ See notes 59-60 supra and accompanying text.
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    Therefore, for the reasons discussed above, the Commission finds 
that the Proposed Rule Change is reasonably designed to enable NSCC to 
effectively identify, measure, monitor, and manage its credit exposure 
to members, and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each member fully with a high 
degree of confidence consistent with Rule 17Ad-22(e)(4)(i).\65\
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    \65\ 17 CFR 240.17Ad-22(e)(4)(i).
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C. Consistency With Rule 17Ad-22(e)(6)(i) Under the Act

    Rule 17Ad-22(e)(6)(i) under the Act requires that each covered 
clearing agency that provides central counterparty services, like 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.\66\
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    \66\ 17 CFR 240.17Ad-22(e)(6)(i).
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    As described above in Section II, each member's margin consists of 
a number of applicable components, each of which is calculated to 
address specific risks faced by NSCC. The Commission agrees that the 
proposal to adopt an intraday volatility charge set forth in Section 
II.B should enable NSCC to more effectively address the risks presented 
by significant intraday changes to market volatility or a member's 
portfolio of net unsettled positions. NSCC provided information 
regarding the impact of the proposed intraday volatility charge on its 
margin collection.\67\ Specifically, a recent

[[Page 16686]]

impact study shows that the proposal would have resulted in 
approximately eight intraday volatility charges collected on an average 
day during that time period, and such charges would have been an 
average of $31.6 million, ranging in size from $251,000 to $1.35 
billion.\68\ The Commission has reviewed NSCC's analysis and agrees 
that its results indicate that NSCC's proposal results in margin levels 
commensurate with the credit exposures to better reflect the intraday 
changes to market volatility or the size of a member's portfolio.
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    \67\ As part of the Proposed Rule Change, NSCC filed Exhibit 
3a--NSCC Intraday Volatility Charge Impact Study Data, comparing the 
current and proposed margin collections. Pursuant to 17 CFR 240.24b-
2, NSCC requested confidential treatment of Exhibit 3a. The 
confidential information provided more granular support for this 
analysis.
    \68\ See id. and Notice of Filing, supra note 3, at 43361.
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    One commenter raised concerns with respect to the analysis cited by 
NSCC in the Proposed Rule Change, stating that NSCC did not provide any 
data to support its assertion that it occasionally observed significant 
intraday changes to market price volatility.\69\ Consistent with NSCC's 
statement regarding observing volatility, the Commission notes that 
this time period includes periods of significant intraday market 
volatility, including, for example, the initial Covid-19 volatility in 
March 2020 and the meme stock trading in January 2021. Moreover, the 
Commission believes that the information submitted by NSCC 
confidentially provides an overview of how the proposed charge would 
have helped NSCC address any intraday exposures related to such market 
volatility. For each trading date during the January 2020 through March 
2021 time period, the data provided to the Commission indicates the 
start of day VaR collected by NSCC across all members, what the 
intraday VaR need is for all of NSCC as of 4 p.m., the MRD offset, what 
the intraday volatility charge would have been, and the number of 
members affected by a call. Based on its review of this data, which 
indicates what NSCC's intraday exposures would have been during this 
timeframe by comparing the start of day VaR amounts to the intraday VaR 
charge based on the day's trading activity, the Commission believes 
that the proposed intraday volatility charge would help NSCC address 
significant intraday exposures. Moreover, the commenter indicates that 
its own analysis showed that it would have incurred an intraday 
volatility charge approximately once per week.\70\ The Commission does 
not disagree that such a frequency could be possible depending on the 
commenter's portfolio and any intraday market volatility, and the 
Commission does not believe that this information renders the proposed 
intraday volatility charge unreasonable.
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    \69\ Letter from John S. Markle, VP and Deputy General Counsel, 
Robinhood Securities LLC, at 2 (Aug. 23, 2022), available at https://www.sec.gov/comments/sr-nscc-2022-009/srnscc2022009-20137444-307937.pdf (``Robinhood Letter'').
    \70\ Robinhood Letter at 2, supra note 69.
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    As set forth in the proposed rule text filed with this Proposed 
Rule Change,\71\ the proposed intraday volatility charge would provide 
NSCC the authority to reduce the applicable threshold of 100 percent 
``if [NSCC] determines that a reduction of the threshold is appropriate 
to mitigate risks to [NSCC] by accelerating the collection of 
anticipated additional margin from those Members whose portfolios may 
present relatively larger risks to [NSCC] on an overnight basis,'' 
including, for example, during volatile market conditions or market 
events that cause increases in trading volumes. The Commission believes 
that this ability is reasonable and consistent with NSCC's need to 
manage the risks arising from intraday volatility because it would 
allow NSCC to respond to market stress in a manner appropriate to the 
circumstances.
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    \71\ See proposed Section I(B)(6) of Procedure XV, available at 
https://www.sec.gov/rules/sro/nscc/2022/34-95286-ex5.pdf.
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    One commenter stated that the proposal did not specify how far NSCC 
could reduce the intraday volatility charge threshold.\72\ The 
Commission does not believe that the lack of a floor for the threshold 
is unreasonable. NSCC could only lower the threshold, if NSCC 
determines that a reduction of the threshold is appropriate to mitigate 
risks to NSCC by accelerating the collection of anticipated additional 
margin from members whose portfolios may present relatively larger 
risks to NSCC on an overnight basis, for example, during volatile 
market conditions or market events that cause increases in trading 
volumes, and as approved consistent with its internal procedures, which 
the Commission has reviewed as part of the materials submitted 
confidentially.\73\ and the Commission does not believe that a floor is 
necessary to ensure transparency. In addition, the Commission 
understands that members would be informed of any changes to the 
threshold, based on its review of the confidential materials submitted 
in connection with this Proposed Rule Change.\74\ The Commission also 
notes that NSCC has similar authority with respect to its intraday 
mark-to-market charge in its existing Rules.\75\ Moreover, as discussed 
in Section III.D infra, the Commission believes that the increased 
transparency arising from the Proposed Rule Change with respect to 
intraday volatility should overall improve a member's ability to 
understand the potential charges to which it may be subject.
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    \72\ Robinhood Letter at 2, supra note 69.
    \73\ See notes 48 and 71 supra.
    \74\ See note 43 supra.
    \75\ See Procedure XV, Section I(B)(5) of the Rules, supra note 
10.
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    Moreover, given the deficiencies in the current calculation of the 
intraday backtesting charge, the Commission believes NSCC's proposal to 
eliminate the intraday backtesting charge would continue to allow NSCC 
to maintain a risk-based margin system that considers, and produces 
margin levels commensurate with the risks of its members' portfolios.
    Accordingly, the Commission finds the proposal is consistent with 
Rule 17Ad-22(e)(6)(i) under the Act because it is designed to assist 
NSCC in maintaining a risk-based margin system that considers, and 
produces margin levels commensurate with, the risks of portfolios that 
experience significant volatility on an intraday basis.\76\
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    \76\ 17 CFR 240.17Ad-22(e)(6)(i).
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D. Consistency With Rule 17Ad-22(e)(23)(ii) Under the Act

    Rule 17Ad-22(e)(23)(ii) under the Act requires that each covered 
clearing agency, like NSCC, 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 NSCC.\77\ The Commission believes that the proposal is consistent 
with Rule 17Ad-22(e)(23)(ii) under the Act for the reason stated below.
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    \77\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    As described above in Section II.B, NSCC is proposing to amend its 
Rules to include a description of the intraday volatility charge, 
including the thresholds that would trigger the collection of the 
charge, the exceptions to the collection of the charge when the 
thresholds are met, the method by which NSCC would calculate that 
charge, and NSCC's discretion to reduce the percent threshold that 
triggers the collection of the charge, including the circumstances when 
NSCC may exercise this discretion. Additionally, NSCC represents that 
members would be able to continue to use existing tools, including the 
ability to view the calculated volatility charge in 15-minute 
increments throughout the business day

[[Page 16687]]

and the VaR margin calculator available on NSCC's Risk Client Portal, 
to monitor their positions and anticipate any potential intraday 
charges. For these reasons, the Commission believes the Proposed Rule 
Change would provide members with sufficient information regarding when 
and how NSCC may collect additional amounts to address the risks of 
portfolios that experience significant volatility on an intraday basis. 
The Commission also believes that the specificity regarding how and 
when NSCC would calculate the intraday volatility charge provides 
additional transparency over the ``special charge'' in NSCC's Rules 
that allows NSCC to collect a special charge in times of market 
volatility or price fluctuations. As NSCC states, ``[w]hen the intraday 
volatility charge is triggered, a special charge would not also be 
required from a Member to address the same volatility risks.'' \78\
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    \78\ See Notice of Filing, supra note 3, at 43359-60.
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    Finally, one commenter asserted that the proposal failed to provide 
any information regarding what would happen if a member fails to meet 
an intraday volatility charge.\79\ However, NSCC's Rules address a 
member's requirement to meet its obligations with respect to required 
margin, as determined by NSCC, and set forth NSCC's authority if a 
member does not meet its obligations.\80\ Therefore, the Commission 
disagrees that this proposal should have provided more information on 
what happens if a member does not meet this type of margin call.
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    \79\ Robinhood Letter at 2-3, supra note 69.
    \80\ See Rule 4, Section 1 and Procedure XV, Section II(B) of 
the Rules, supra note 10. See also Letter from Timothy Hulse, 
Managing Director, DTCC, at 1-2 (Sept. 27, 2022), available at 
https://www.sec.gov/comments/sr-nscc-2022-009/srnscc2022009-20144273-309218.pdf.
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    Accordingly, the Commission finds that the Proposed Rule Change 
would enable NSCC to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide 
sufficient information to enable members to identify and evaluate the 
risks, fees, and other material costs they incur as NSCC members, 
consistent with Rule 17Ad-22(e)(23)(ii).

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \81\ and 
the rules and regulations promulgated thereunder.
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    \81\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\82\ that proposed rule change SR-NSCC-2022-009, be, and hereby is, 
approved.\83\
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    \82\ 15 U.S.C. 78s(b)(2).
    \83\ In approving the Proposed Rule Change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
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    \84\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05447 Filed 3-17-23; 8:45 am]
BILLING CODE 8011-01-P


