[Federal Register Volume 80, Number 148 (Monday, August 3, 2015)]
[Notices]
[Pages 46072-46074]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-18905]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75541; File No. SR-NSCC-2015-802]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Advance Notice To Establish a 
Prefunded Liquidity Program as Part of NSCC's Liquidity Risk Management

July 28, 2015.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 \1\ (``Clearing 
Supervision Act'') and Rule 19b-4(n)(1)(i) \2\ under the Securities 
Exchange Act of 1934, notice is hereby given that on June 26, 2015, 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the advance notice 
SR-NSCC-2015-802 (``Advance Notice'') as described in Items I and II, 
which Items have been prepared by NSCC. The Commission is publishing 
this notice to solicit comments on the Advance Notice from interested 
persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This Advance Notice is filed by NSCC in connection with a proposed 
liquidity program to raise prefunded liquidity through the issuance and 
private placement of short-term, unsecured notes (``Prefunded Liquidity 
Program''), which will consist of a combination of commercial paper 
notes and extendible notes. The Prefunded Liquidity Program would 
supplement NSCC's existing default liquidity risk management resources.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, NSCC included statements 
concerning the purpose of and basis for the Advance Notice and 
discussed any comments it received on the Advance Notice. The text of 
these statements may be examined at the places specified in Item IV 
below. NSCC has prepared summaries, set forth in sections (A) and (B) 
below, of the most significant aspects of these statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

    Written comments on the Advance Notice have not been solicited or 
received. NSCC will notify the Commission of any written comments 
received by NSCC.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act

Description of Change
    NSCC proposes to establish the Prefunded Liquidity Program in order 
to raise prefunded liquidity and diversify its liquidity resources 
through the private placement of unsecured debt, consisting of a 
combination of short-term promissory notes (``Commercial Paper 
Notes''), and extendible-term promissory notes (``Extendible Notes'', 
together with the Commercial Paper Notes, ``Notes''), to institutional 
investors in an aggregate amount not to exceed $5 billion. The proceeds 
from the Prefunded Liquidity Program would supplement NSCC's existing 
liquidity resources, which collectively provide NSCC with liquidity to 
complete end-of-day settlement in the event of the default of an NSCC 
Member.\3\
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    \3\ Terms not defined herein are defined in NSCC's Rules and 
Procedures (``Rules'') available at http://dtcc.com/~/media/Files/
Downloads/legal/rules/nscc_rules.pdf. The events that constitute a 
Member default are specified in NSCC's Rule 46 (Restrictions on 
Access to Services), which provides that NSCC's Board of Directors 
may suspend a Member or prohibit or limit a Member's access to 
NSCC's services in enumerated circumstances; this includes default 
in delivering funds or securities to NSCC, or a Member's 
experiencing such financial or operational difficulties that NSCC 
determines, in its discretion, that restriction on access to 
services is necessary for its protection and for the protection of 
its membership.
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    Terms of the Prefunded Liquidity Program. NSCC has engaged an 
issuing and paying agent, as well as certain placement agent dealers, 
to develop a program to issue the Notes. The Notes would be issued to 
institutional investors through a private placement and offered in 
reliance on an exemption from registration under Section 4(a)(2) of the 
Securities Act of 1933.\4\ NSCC would be party to certain transaction 
documents required to establish the Prefunded Liquidity Program, 
including an issuing and paying agent agreement, and a dealer agreement 
with each of the placement agent dealers. The dealer agreements would 
each be based on the standard form of dealer agreement for commercial 
paper programs, which is published by the Securities Industry and 
Financial Markets Association. The material terms and conditions of the 
Prefunded Liquidity Program are summarized below.
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    \4\ 15 U.S.C. 77d(4)(a)(2) [sic].
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    The Prefunded Liquidity Program would be established as a 
combination of both Commercial Paper Notes, which typically have 
shorter maturities, and Extendible Notes, which typically have longer 
maturities, in order to facilitate the staggering of the maturities of 
the issued Notes. NSCC intends to structure the Prefunded Liquidity 
Program such that the maturities of the issued Notes are staggered to 
avoid concentrations of maturing liabilities. The average maturity of 
the aggregate Notes outstanding issued under the Prefunded Liquidity 
Program is broadly estimated to range between three and six months. The 
Commercial Paper Notes and the Extendible Notes would be represented by 
one or more master notes issued in the name of The Depository Trust 
Company (``DTC''), or its nominee. The Notes would be issued only 
through the

[[Page 46073]]

book-entry system of DTC and would not be certificated.
    The Commercial Paper Notes would either be interest bearing or be 
sold at a discount from their face amount, and the Extendible Notes 
would be interest bearing. Interest payable on the Notes would be at 
market rates customary for such type of debt and reflective of the 
creditworthiness of NSCC. The Commercial Paper Notes would have a 
maturity not to exceed 397 calendar days from the date of issue, and 
would not be redeemable by NSCC prior to maturity, nor would they 
contain any provision for extension, renewal, automatic rollover or 
voluntary prepayment. The Extendible Notes would have an initial 
maturity of 397 calendar days from the date of issue. However, each 
month following the date of issue, the holder of an Extendible Note 
would be permitted to elect to extend the maturity of all or a portion 
of the principal amount of such Extendible Note for an additional 30 
calendar days. A holder of an Extendible Note would be permitted to 
continue to extend its Extendible Note up to the final maturity date, 
which is expected to be a maximum of six years from the date of issue. 
If a holder of an Extendible Note fails to exercise its right to extend 
the maturity of all or a portion of the Extendible Note, such portion 
of the Extendible Note would be deemed to be represented by a new note 
(``Non-Extended Note''), and NSCC would have the option to redeem any 
Non-Extended Note in whole, but not in part, at any time prior to the 
maturity date of that Non-Extended Note, which would be 12 months from 
the date on which they opted not to extend.
    NSCC would hold the proceeds from the issuance of the Notes in a 
cash deposit account at the Federal Reserve Bank of New York 
(``FRBNY'').\5\ Pending the establishment of NSCC's account at the 
FRBNY, however, such proceeds would be maintained in accounts with 
creditworthy financial institutions in accordance with DTCC's 
Investment Policy.\6\ NSCC currently invests its Clearing Fund deposits 
in the same manner, and acceptable investments under DTCC's Investment 
Policy include reverse repurchase agreements, money market mutual fund 
investments, bank deposits and commercial paper bank sweep deposits. In 
all cases, these amounts would be available to draw to complete 
settlement as needed.
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    \5\ Pursuant to Section 806(a) under Title VIII of the Clearing 
Supervision Act, and Section 234.6 of the Federal Reserve Regulation 
HH promulgated thereunder, NSCC, as a designated systemically 
important financial market utility (``SIFMU'') under the Clearing 
Supervision Act, has applied for a cash deposit account at the 
FRBNY, as well as subscription to ancillary FRBNY services that will 
facilitate the use of the requested cash deposit account. See 12 
U.S.C. 5465(a); 12 CFR 234.6. The application is pending with the 
FRBNY as of the date of this filing.
    \6\ NSCC manages investment risk, including the custody and 
overnight investment of Clearing Fund cash, through the corporate 
Investment Policy, which establishes credit and concentration 
exposure limits on NSCC's investment counterparties and governs 
NSCC's investments of cash, including the custody and overnight 
investment of Clearing Fund cash.
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    NSCC Liquidity Risk Management. As a central counterparty 
(``CCP''), NSCC occupies an important role in the securities settlement 
system by interposing itself between counterparties to financial 
transactions, thereby reducing the risk faced by its Members and 
contributing to global financial stability. NSCC's liquidity risk 
management framework plays an integral part in NSCC's ability to 
perform this role, and is designed to ensure that NSCC maintains 
sufficient liquid resources to timely meet its payment (principally 
settlement) obligations with a high degree of confidence.
    NSCC's liquidity needs are driven by the requirement to complete 
end-of-day settlement, on an ongoing basis, in the event of Member 
default. If an NSCC Member defaults, as a CCP for the cash markets, 
NSCC will need to complete settlement of guaranteed transactions on the 
failing Member's behalf from the date of default through the remainder 
of the settlement cycle (currently three days for securities that 
settle on a regular way basis in the U.S. equities markets).
    NSCC measures and manages its liquidity risk by performing daily 
simulations that measure the amount of liquidity that would be required 
by NSCC in a number of scenarios, including amounts required over the 
settlement cycle in the event that the Member or Member family to which 
NSCC has the largest aggregate liquidity exposure defaults. NSCC seeks 
to maintain qualified liquidity resources in an amount sufficient to 
meet this requirement. NSCC's existing liquidity resources include: (1) 
The cash in NSCC's Clearing Fund; (2) the cash that would be obtained 
by drawing upon NSCC's committed 364-day credit facility with a 
consortium of banks; and (3) additional cash deposits, known as 
``Supplemental Liquidity Deposits'', designed to cover the heightened 
liquidity exposure arising around monthly option expiry periods, 
required from those Members whose activity would pose the largest 
liquidity exposure to NSCC.\7\ The proceeds from the Prefunded 
Liquidity Program would supplement these liquidity resources. Further, 
NSCC would consider the proceeds from the Prefunded Liquidity Program 
to be qualifying liquidity resources under NSCC's Rule 4A.
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    \7\ Supplemental Liquidity Deposits are described in NSCC Rule 
4A, supra Note 1 [sic].
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    By providing NSCC with additional, prefunded, and readily available 
liquidity resources to be used to complete end-of-day settlement as 
needed in the event of a Member default, the proposed Prefunded 
Liquidity Program would provide additional certainty, stability, and 
safety to NSCC, its Members, and the U.S. equities market that it 
serves. The Prefunded Liquidity Program is also designed to reduce 
NSCC's concentration risk with respect to its liquidity resources since 
it is anticipated that many of the potential institutional investors 
who would be purchasers of the Notes are not currently providing 
liquidity resources to NSCC.
    The Prefunded Liquidity Program was developed in coordination with 
a standing advisory group, the Clearing Agency Liquidity Council 
(``CALC''), which includes representatives of NSCC's Members and 
participants of NSCC's affiliate, the Fixed Income Clearing 
Corporation. The CALC was established in 2013 in order to facilitate 
dialogue between these clearing agencies and their participants 
regarding liquidity initiatives.\8\
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    \8\ Reference to the establishment of the CALC was made in the 
Commission's order approving the proposed rule changes implementing 
the Supplemental Liquidity Deposits. Securities Exchange Act Release 
No. 70999 (December 5, 2013), 78 FR 75413 (December 11, 2013) (File 
No. SR-NSCC-2013-02).
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Anticipated Effect on and Management of Risk
    NSCC's consistent ability to timely complete settlement is a key 
part of NSCC's role as a CCP and allows NSCC to mitigate counterparty 
risk within the U.S. markets. In order to sufficiently perform this key 
role in promoting market stability, it is critical that NSCC has access 
to liquidity resources to enable it to complete end-of-day settlement, 
notwithstanding the default of a Member. NSCC believes that the overall 
impact of the Prefunded Liquidity Program on risks presented by NSCC 
would be to reduce the liquidity risks associated with NSCC's operation 
as a CCP by providing it with an additional source of liquidity to 
complete end-of-day settlement in the event of a Member default. NSCC

[[Page 46074]]

further believes that a reduction in its liquidity risk would reduce 
systemic risk and would have a positive impact on the safety and 
soundness of the clearing system.
    While the Prefunded Liquidity Program, like any liquidity resource, 
would involve certain risks, most of these risks are standard in any 
commercial paper or extendible note program. One risk associated with 
the Prefunded Liquidity Program would be the risk that NSCC does not 
have sufficient funds to repay issued Notes when they mature. NSCC 
believes that this risk is extremely remote, as the proceeds of the 
Prefunded Liquidity Program would be used only in the event of a Member 
default, and NSCC would replenish that cash, as it would replenish any 
of its liquidity resources that are used to facilitate settlement in 
the event of a Member default, with the proceeds of the close out of 
that defaulted Member's portfolio. This notwithstanding, in the event 
that proceeds from the close out are insufficient to fully repay a 
liquidity borrowing, then NSCC would look to its loss waterfall to 
repay any outstanding liquidity borrowings. NSCC would further mitigate 
this risk by structuring the Prefunded Liquidity Program so that the 
maturity dates of the issued Notes are sufficiently staggered, which 
would provide NSCC with time to complete the close out of a defaulted 
Member's portfolio. A second risk is that NSCC may be unable to issue 
new Notes as issued Notes mature. This risk is mitigated by the fact 
that NSCC maintains a number of different liquidity resources, 
described above, and would not depend on the Prefunded Liquidity 
Program as its sole source of liquidity. As such, NSCC believes that 
the significant systemic risk mitigation benefits of providing NSCC 
with additional, prefunded liquidity resources outweigh these risks.
    Consistency with Clearing Supervision Act. By supplementing NSCC's 
existing liquidity resources with prefunded liquidity, the proposed 
Prefunded Liquidity Program would contribute to NSCC's goal of assuring 
that NSCC has adequate liquidity resources to meet its settlement 
obligations notwithstanding the default of any of its Members. As such, 
the proposed Prefunded Liquidity Program is consistent with Section 
805(b)(1) of the Clearing Supervision Act, the objectives and 
principles of which specify the promotion of robust risk management, 
promotion of safety and soundness, reduction of systemic risks and 
support of the stability of the broader financial system.\9\
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    \9\ 12 U.S.C. 5464(b)(1).
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III. Date of Effectiveness of the Advance Notice, and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. NSCC shall not implement the proposed change if the 
Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing NSCC with prompt written notice of the 
extension. The proposed change may be implemented in less than 60 days 
from the date the Advance Notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies NSCC in writing that it does not object to the proposed change 
and authorizes NSCC to implement the proposed change on an earlier 
date, subject to any conditions imposed by the Commission.
    NSCC shall post notice on its Web site of proposed changes that are 
implemented.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the Advance 
Notice is consistent with the Clearing Supervision 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-2015-802 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2015-802. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the Advance Notice that are filed 
with the Commission, and all written communications relating to the 
Advance Notice 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 Web site 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 NSCC's Web site 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NSCC-2015-802 and should be submitted on 
or before August 18, 2015.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-18905 Filed 7-31-15; 8:45 am]
BILLING CODE 8011-01-P