[Federal Register Volume 88, Number 57 (Friday, March 24, 2023)]
[Notices]
[Pages 17898-17900]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06059]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97171; File No. SR-NSCC-2022-015]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Make Certain 
Enhancements to the Gap Risk Measure and the VaR Charge

March 20, 2023.

I. Introduction

    On December 2, 2022, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2022-015 (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 
December 21, 2022,\3\ and the Commission has received one comment 
regarding the changes proposed in 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. 96511 (Dec. 15, 
2022), 87 FR 78157 (Dec. 21, 2022) (File No. SR-NSCC-2022-015) 
(``Notice of Filing'').
    \4\ Comments are available at https://www.sec.gov/comments/sr-nscc-2022-015/srnscc2022015.htm.
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    On January 24, 2023, 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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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 96740 (Jan. 24, 2023), 
88 FR 5953 (Jan. 30, 2023) (SR-NSCC-2022-015).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

    A key tool that NSCC uses to manage its respective credit exposures 
to its members is the daily collection of margin from each member, 
which is referred to as each member's Required Fund Deposit.\8\ The 
aggregated amount

[[Page 17899]]

of all members' margin constitutes the Clearing Fund, which NSCC would 
access should a defaulted member's own margin be insufficient to 
satisfy losses to NSCC caused by the liquidation of that member's 
portfolio.
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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 the Rules, available at https://www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
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    Each member's margin consists of a number of applicable components, 
each of which is calculated to address specific risks faced by NSCC.\9\ 
Generally, the largest portion of a member's margin is the volatility 
component, often referred to as the VaR Charge, which 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. Under NSCC's 
current rules, one of the potential methods of calculating the VaR 
Charge relies on a measure of gap risk.\10\ It does not accrue for all 
portfolios, but instead only serves as the VaR Charge if it is the 
largest of three potential calculations.\11\ The gap risk charge was 
designed to address the risk presented by a portfolio that is more 
susceptible to the effects of gap risk events, i.e., those portfolios 
holding positions that represent more than a certain percent of the 
entire portfolio's value, such that the event could impact the entire 
portfolio's value.\12\
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    \9\ See Procedure XV of the Rules, supra note 8.
    \10\ Gap risk events have been generally understood as 
idiosyncratic issuer events (for example, earning reports, 
management changes, merger announcements, insolvency, or other 
unexpected, issuer-specific events) that cause a rapid shift in 
price volatility levels.
    \11\ Specifically, the VaR Charge is the greatest of (1) the 
larger of two separate calculations based on different underlying 
estimates that utilize a parametric VaR model, which addresses the 
market risk of a member's portfolio (referred to as the core 
parametric estimation), (2) the gap risk calculation, and (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.
    \12\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of 
Procedure XV of the Rules, supra note 8. See also Exchange Act 
Release Nos. 82780 (Feb. 26, 2018), 83 FR 9035 (Mar. 2, 2018) (SR-
NSCC-2017-808); 82781 (Feb. 26, 2018), 83 FR 9042 (Mar. 2, 2018) 
(SR-NSCC-2017-020) (``Initial Filing'').
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    To calculate the gap risk charge, NSCC multiplies the gross market 
value of the largest non-index net unsettled position in the portfolio 
by a gap risk haircut, which can be no less than 10 percent (``gap risk 
haircut'').\13\ Currently, NSCC determines the gap risk haircut 
empirically as no less than the larger of the 1st and 99th percentiles 
of three-day returns of a set of CUSIPs that are subject to the VaR 
Charge pursuant to the Rules, giving equal rank to each to determine 
which has the highest movement over that three-day period. NSCC uses a 
look-back period of not less than ten years plus a one-year stress 
period, and if the one-year stress period overlaps with the look-back 
period, only the non-overlapping period would be combined with the 
look-back period. The resulting haircut is then rounded up to the 
nearest whole percentage and applied to the largest non-index net 
unsettled position to determine the gap risk charge.
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    \13\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of 
Procedure XV, supra note 8.
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    As described in the Notice, NSCC proposes to modify Procedure XV 
(Clearing Fund Formula and Other Matters) of NSCC's Rules & Procedures 
(``Rules'') to make the following changes to the gap risk charge: (1) 
make the gap risk charge an additive component of the member's total 
VaR Charge when it is applicable, rather than being applied as the 
applicable VaR Charge only when it is the largest of three separate 
calculations, (2) adjusting the gap risk charge to be based on the two 
largest positions in a portfolio, rather than based on the single 
largest position, (3) changing the floor of the gap risk haircut from 
10 percent to 5 percent for the largest position, adding a floor of the 
gap risk haircut of 2.5 percent for the second largest position, and 
providing that gap risk haircuts would be determined based on 
backtesting and impact analysis, and (4) amending which ETF positions 
are excluded from the gap risk charge to more precisely include ETFs 
that are more prone to gap risk, i.e., are non-diversified.

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 \14\ 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, 
providing 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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    \14\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\15\ 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,\16\ and the 
rules thereunder, including the following provisions:
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    \15\ Id.
    \16\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\17\ which requires, among 
other things, that the rules of a clearing agency must be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, 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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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(4)(i) of the Act, \18\ which requires that 
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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    \18\ 17 CFR 240.17Ad-22(e)(4)(i).
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     Rule 17Ad-22(e)(6)(i) of the Act,\19\ which requires that 
a covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to cover, if the 
covered clearing agency provides central counterparty services, 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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    \19\ 17 CFR 240.17Ad-22(e)(6)(i).
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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,\20\ and 
Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii) of the Act,\21\ or 
any other

[[Page 17900]]

provision of the Act, or the rules and regulations thereunder.
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii).
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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 April 14, 2023. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
April 28, 2023.
    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,\22\ in addition to any other comments they may 
wish to submit about the Proposed Rule Change.
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    \22\ 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 [email protected]. Please include 
File Number SR-NSCC-2022-015 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-2022-015. 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-2022-015 and should be submitted on 
or before April 14, 2023. Rebuttal comments should be submitted by 
April 28, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(31).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-06059 Filed 3-23-23; 8:45 am]
BILLING CODE 8011-01-P


