[Federal Register Volume 88, Number 73 (Monday, April 17, 2023)]
[Notices]
[Pages 23482-23485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-07961]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97280; File No. SR-NSCC-2023-003]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed 
Rule Change To Update the Clearing Agency Securities Valuation 
Framework

April 11, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 28, 2023, 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. NSCC filed the 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6) thereunder.\4\ 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 the Clearing 
Agency Securities Valuation Framework (``Framework'') of NSCC and its 
affiliates, Fixed Income Clearing Corporation (``FICC,'' and together 
with NSCC, the central counterparties or ``CCPs'') and The Depository 
Trust Company (``DTC,'' and together with the CCPs, the ``Clearing 
Agencies''), as described below. The proposed changes to the Framework 
would apply to DTC, NSCC, and both of FICC's divisions, the Government 
Securities Division and the Mortgage-Backed Securities Division.

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
    The proposed rule change consists of modifications to the Framework 
to clarify the Clearing Agencies' practices concerning the valuation of 
(i) securities eligible for clearance and settlement processing by the 
applicable Clearing Agency and (ii) with respect to the CCPs, eligible 
securities in their respective Clearing Funds (each, a ``CUSIP''). 
Specifically, the proposed rule change would clarify certain aspects of 
the Framework concerning (i) the selection of third-party pricing 
vendors (``Pricing Vendors''); (ii) the monitoring and review of 
Pricing Vendor data; (iii) the processing and use of Pricing Vendor 
data; and (iv) other non-substantive aspects of the Framework. The 
proposed changes are discussed in detail below.
(i) Background
    The Clearing Agencies maintain a Framework that sets forth the 
manner in which each of the Clearing Agencies identifies, measures, 
monitors, and manages the risks related to the pricing of securities 
processed or otherwise held by such Clearing Agencies, including (i) 
CUSIPs eligible for clearance and settlement processing by the 
applicable Clearing Agency and (ii) with respect to the CCPs, eligible 
CUSIPs in their respective Clearing Funds.\5\ The Framework describes, 
among other things, the Clearing Agencies' use of Pricing Vendors and 
the monitoring, reviewing and processing of pricing data for end-of-day 
and intraday pricing.
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    \5\ See Securities Exchange Act Release No. 82006 (November 2, 
2017), 82 FR 51892 (November 8, 2017) (SR-DTC-2017-016; SR-NSCC-
2017-016; SR-FICC-2017-020).
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    The Framework is owned and managed by an officer within the DTCC 
Securities Valuation team, which is part of the Group Chief Risk Office 
of DTCC, on behalf of the Clearing Agencies.\6\ The processes and 
systems described in the Framework, and any policies, procedures, or 
other documents created to support those processes, support the 
Clearing Agencies' compliance with the

[[Page 23483]]

requirements of Rule 17Ad-22(e)(4)(i) \7\ and, with respect to the 
CCPs, Rule 17Ad-22(e)(6)(iv) \8\ under the Act.
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    \6\ The parent company of the Clearing Agencies is The 
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on 
a shared services model with respect to the Clearing Agencies. Most 
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is 
generally DTCC that provides a relevant service to a Clearing 
Agency.
    \7\ 17 CFR 240.17Ad-22(e)(4)(i).
    \8\ 17 CFR 240.17Ad-22(e)(6)(iv).
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(ii) Proposed Rule Change
    The Clearing Agencies propose to revise the Framework to improve 
the accuracy and clarity of the descriptions of the Clearing Agencies' 
practices concerning securities valuation. Specifically, the Clearing 
Agencies propose to revise the Framework to: (i) clarify certain 
aspects of the Pricing Vendor selection process; (ii) clarify the 
description of the Clearing Agencies' practices for monitoring and 
reviewing Pricing Vendor data; (iii) clarify the description of the 
Clearing Agencies' processes concerning the use of end-of day and 
intraday CUSIP pricing data; and (iv) make other non-substantive 
clarifying and clean-up changes to the Framework. Each of these 
categories of changes are discussed in further detail below.
Selection of Pricing Vendors
    Pursuant to the Framework, the Clearing Agencies select Pricing 
Vendors based on a review of their services, which includes a review of 
their securities coverage, price quality checks, and other due 
diligence prior to engagement. Once a Pricing Vendor is engaged, the 
Securities Valuation team assesses the reliability of each Pricing 
Vendor at least annually.
    The Clearing Agencies propose minor modifications to the Framework 
concerning the Pricing Vendor selection process. The Clearing Agencies 
propose to revise the Framework to state that Pricing Vendors are 
selected based on a ``service review'' as opposed to a ``review of 
their service.'' The proposed rule change is not intended to reflect a 
material change to the Pricing Vendor selection process, but rather, 
would more accurately reflect the scope of any potential review 
performed for Pricing Vendors, which may include factors beyond just 
the specific service provided (e.g., it may include a review of certain 
attributes of the Pricing Vendor itself).
    The Clearing Agencies also propose to revise the Framework to 
clarify that when reviewing the reliability of a Pricing Vendor, the 
Clearing Agencies would consider whether the Pricing Vendor actually 
provides accurate and timely pricing data as opposed to whether the 
Pricing Vendor is ``able to provide'' accurate and timely data. The 
Clearing Agencies believe the proposed rule change would more clearly 
and accurately reflect the expectation that the Pricing Vendor has 
actually provided accurate and timely pricing data and thereby further 
ensure that the Clearing Agencies' policies and procedures are 
reasonably designed to use reliable sources of timely price data.
Monitoring and Review of Pricing Vendor Data
    Pursuant to the Framework, the Securities Valuation team monitors 
and reviews each Pricing Vendor's pricing at least once each business 
day. This includes a review of whether any CUSIP's price has remained 
unchanged for an extended period of time, whether a CUSIP has been 
dropped from the Pricing Vendor's file and whether other circumstances 
exist that may call into question the reliability of any CUSIP's price.
    The Clearing Agencies propose to make certain non-substantive 
clarifying and grammatical corrections to the Framework concerning the 
monitoring of Pricing Vendors. The proposed changes would clarify that 
the scope of daily monitoring and review includes a determination of 
whether (i) an ``eligible'' CUSIP's price has remained unchanged for an 
extended period (as opposed to inferring ``all CUSIPS'' for which a 
vendor may provide pricing in a given file) and (ii) other ``relevant'' 
circumstances exist that ``could'' call into question the reliability 
of a CUSIP's price. These proposed changes are intended to enhance the 
clarity and drafting of the Framework and are not intended to result in 
a material change to the monitoring and review processes.
Processing and Use of Pricing Vendor Data
    The Framework currently provides that the Securities Valuation team 
assigns each CUSIP a primary source Pricing Vendor and a secondary 
source Pricing Vendor and that, in the event that the primary Pricing 
Vendor becomes unavailable, unreliable, or otherwise unusable with 
respect to a CUSIP, the secondary Pricing Vendor will be designated as 
the replacement for the primary Pricing Vendor with respect to such 
CUSIP. The Framework also describes the processing of end-of-day and 
intraday pricing from Pricing Vendors. Specifically, the Framework 
provides that each CUSIP's price is date stamped (and in the case of 
intraday pricing, time-stamped) and identified with its Pricing Vendor 
source, and in the event that both primary Pricing Vendor and secondary 
Pricing Vendor become unavailable, unreliable, or otherwise unusable 
with respect to a CUSIP, the Securities Valuation team assigns such 
CUSIP its last available price.
Pricing Vendor Assignments
    The Clearing Agencies propose to revise the Framework to remove the 
statement that the Securities Valuation team assigns each CUSIP a 
primary and secondary source Pricing Vendor and remove corresponding 
references to ``Primary Pricing Vendor'' and ``Secondary Pricing 
Vendor'' throughout the Framework. The Clearing Agencies maintain 
relationships with more than one Pricing Vendor for the majority of 
their products; however, this may not be the case in all circumstances. 
For example, the Clearing Agencies may not maintain multiple Pricing 
Vendors for products that are cleared based on the pricing of another 
similar product for which they also maintain Pricing Vendor 
relationships. The Clearing Agencies also may not perform intra-day 
pricing for certain asset classes that are not subject to clearance and 
netting services. The Clearing Agencies therefore believe the proposed 
change would more accurately reflect the Clearing Agencies' practices 
for maintaining Pricing Vendors. The proposed changes would further 
clarify that the Clearing Agencies may not maintain ``primary'' and 
``secondary'' vendors for all CUSIPs, and that the Clearing Agencies 
may use whichever Pricing Vendor proves to be available and reliable 
for a CUSIP at a given time without relying on such ``primary'' and 
``secondary'' designations. The proposed changes would also provide 
additional clarity and flexibility for the Clearing Agencies to 
maintain more than two Pricing Vendors for a product area/CUSIP or, 
where appropriate, reduce the number of Pricing Vendor relationships it 
may maintain for any given product area or CUSIP, as governed by 
applicable Securities Valuation policies and procedures.
    The Clearing Agencies would also revise the Framework to specify 
that in the event a Pricing Vendor becomes unavailable, unreliable, or 
otherwise unusable with respect to a CUSIP, back-up pricing would be 
utilized to provide accurate and timely pricing data with respect to 
such CUSIP. The proposed change would more accurately reflect that 
backup pricing may be sourced from an alternative Pricing Vendor, where 
applicable, or may also be determined, in the absence of an alternative 
Pricing Vendor, pursuant to the Clearing Agencies' applicable policies 
and procedures to ensure that timely pricing data is applied.

[[Page 23484]]

End-of-Day and Intraday Price Processing
    The Clearing Agencies also propose to clarify their processes for 
recording end-of-day and intraday pricing. The Clearing Agencies would 
revise the Framework to clarify that, with respect to end-of-day and 
intraday pricing, if Pricing Vendor data is unavailable, unreliable, or 
otherwise unusable for a CUSIP, the Securities Valuation team does not 
``assign'' the last available price to the CUSIP, but rather, the last 
available price is recorded in the Clearing Agencies' pricing database, 
which is consumable for applicable stakeholders. The proposed rule 
change would also further clarify that this process would apply if 
pricing data were unavailable, unreliable, or otherwise unusable from 
``all'' Pricing Vendors, and not just the primary or secondary Pricing 
Vendors, for the reasons discussed above. The Clearing Agencies believe 
the proposed changes concerning end-of-day and intraday price 
processing would improve the accuracy and clarity of the Framework.
Other Non-Substantive Clean-Up Changes
    Finally, the Clearing Agencies propose to make several non-
substantive changes to the Framework. For example, the Clearing 
Agencies would revise a statement that the Securities Valuation team 
values each ``applicable'' CUSIP to say each ``eligible'' CUSIP to 
align this statement more clearly with the scope of the policy (i.e., 
those securities eligible for clearance and settlement or for each 
CCPs' clearing fund). The Clearing Agencies would also revise the 
definition of ``Pricing Vendors'' to define them as third-party pricing 
``suppliers'' as opposed to ``vendors'' to eliminate redundancy in the 
definition and align with other language used in the Framework 
concerning their role in supplying prices. Additionally, the Clearing 
Agencies would make several non-substantive, grammatical, and 
punctuation-related clean-up changes throughout the Framework 
(including revisions to a footnote in the policy regarding the 
possibility that certain CUSIPs might not be priced as expected). The 
proposed changes are not intended to change the meaning or purpose of 
the Framework but rather improve the drafting and clarity of the 
Framework.
2. Statutory Basis
    The Clearing Agencies believe that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a registered clearing agency. In 
particular, the Clearing Agencies believe the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act \9\ and Rules 17Ad-
22(e)(4)(i) \10\ and (e)(6)(iv) \11\ under the Act, for the reasons set 
forth below.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 17 CFR 240.17Ad-22(e)(4)(i).
    \11\ 17 CFR 240.17Ad-22(e)(6)(iv).
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    Section 17A(b)(3)(F) of the Act \12\ requires, in part, that the 
rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and 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. The proposed rule change would improve descriptions of the 
Clearing Agencies' processes for selecting Pricing Vendors, reviewing 
the reliability of Pricing Vendors, monitoring and reviewing each 
Pricing Vendor's pricing data, and the processing and use of Pricing 
Vendor data for securities valuation purposes. The proposed rule change 
is designed to improve the accuracy and clarity of the Framework 
document. The Framework and the policies and procedures that support 
the Framework help assure that each Clearing Agency is using reliable 
sources of timely price data for collateral valuation, risk management 
and settlement purposes. Since margin and collateral play key roles in 
the applicable Clearing Agency's risk management process, having 
accurate margin system and collateral valuation facilitates the 
Clearing Agencies' ability to continue the prompt and accurate 
clearance and settlement of securities transactions and assure the 
safeguarding of securities and funds which are in their custody or 
control or for which they are responsible. The Clearing Agencies 
therefore believe that enhancing the quality and accuracy of the 
Framework is consistent with the requirements of Section 17A(b)(3)(F) 
of the Act.
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    Rule 17Ad-22(e)(4)(i) \13\ under the Act requires that each 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 by 
maintaining sufficient financial resources to cover its credit exposure 
to each participant fully with a high degree of confidence. The 
Framework describes how the Clearing Agencies identify, measure, 
monitor, and manage the risks related to the pricing of securities 
processed or otherwise held by the Clearing Agencies. The processes, 
systems, and controls used by the Clearing Agencies to identify, 
measure, monitor, and manage such risks, as described in the Framework, 
and the policies and procedures that support these activities, help 
assure that each Clearing Agency is using (i) reliable sources of 
timely price data when pricing securities processed or otherwise held 
by the applicable Clearing Agency and (ii) procedures and sound 
valuation models when pricing data are not readily available or 
reliable. The proposed rule change would enhance the Framework by 
providing additional clarity and accuracy concerning the Clearing 
Agencies' securities valuation practices, and specifically, its 
processes for selecting Pricing Vendors, reviewing the reliability of 
Pricing Vendors, monitoring and reviewing each Pricing Vendor's pricing 
data, and the processing and use of Pricing Vendor data. By 
appropriately pricing securities, the Clearing Agencies can more 
accurately calculate the value of the securities that the Clearing 
Agencies monitor or hold for risk management purposes. The proposed 
changes are therefore intended to facilitate the maintenance of 
policies and procedures that are reasonably designed to effectively 
identify, measure, monitor and manage the Clearing Agencies' credit 
exposures to participants and those arising from its payment, clearing, 
and settlement processes and determine the amount of financial 
resources required to cover its credit exposure to each participant 
with a high degree of confidence in accordance with the requirements of 
Rule 17Ad-22(e)(4)(i).
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    \13\ 17 CFR 240.17Ad-22(e)(4)(i).
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    Rule 17Ad-22(e)(6)(iv) \14\ under the Act requires each covered 
clearing agency that is a CCP to 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 reliable sources of timely price 
data and uses procedures and sound valuation models for addressing 
circumstances in which pricing data are not readily available or 
reliable. The Framework describes how the CCPs identify, measure, 
monitor, and manage the risks related to the pricing of securities 
processed or otherwise held by the CCPs. As noted above, the proposed 
rule change would

[[Page 23485]]

enhance the Framework by providing additional clarity and accuracy 
concerning the Clearing Agencies' securities valuation practices, and 
specifically, its processes for selecting Pricing Vendors, reviewing 
the reliability of Pricing Vendors, monitoring and reviewing each 
Pricing Vendor's pricing data, and the processing and use of Pricing 
Vendor data. The processes, systems, and controls used by the CCPs to 
identify, measure, monitor, and manage such risks, as described in the 
Framework, and the policies and procedures that support these 
activities, help assure that each CCP is using reliable sources of 
timely price data as well as procedures and sound valuation models when 
pricing data are not readily available or reliable. The Clearing 
Agencies therefore believe the proposed changes to the Framework are 
consistent with the requirements of Rule 17Ad-22(e)(6)(iv).
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    \14\ 17 CFR 240.17Ad-22(e)(6)(iv).
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(B) Clearing Agency's Statement on Burden on Competition

    The Clearing Agencies do not believe that the proposed rule change 
would have any impact, or impose any burden, on competition. The 
proposed changes would enhance the Framework by providing additional 
clarity and accuracy concerning the Clearing Agencies' securities 
valuation processes. The Framework itself, and the proposed rule 
changes described herein, would not advantage or disadvantage any 
particular participant or user of the Clearing Agencies' services or 
unfairly inhibit access to the Clearing Agencies' services. The 
Clearing Agencies therefore do not believe that the proposed rule 
change would have any impact, or impose any burden, on competition.

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

    The Clearing Agencies have not received or solicited any written 
comments relating to this proposal. If any written comments are 
received, they will be publicly filed as an Exhibit 2 to this filing, 
as required by Form 19b-4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
Commission's Division of Trading and Markets at 
[email protected] or 202-551-5777.
    The Clearing Agencies reserve the right not to respond to any 
comments received.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \15\ and 
Rule 19b-4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 [email protected]. Please include 
File Number SR-NSCC-2023-003 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2023-003. 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-2023-003 and should be submitted on 
or before May 8, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-07961 Filed 4-14-23; 8:45 am]
BILLING CODE 8011-01-P


