[Federal Register Volume 83, Number 32 (Thursday, February 15, 2018)]
[Notices]
[Pages 6912-6914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03094]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82676; File No. SR-NSCC-2017-807]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of No Objection to an Advance Notice To Increase 
the Authorized Amount Under the Prefunded Liquidity Program

February 9, 2018.
    On December 12, 2017, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-NSCC-2017-807 (``Advance Notice'') 
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 (``Clearing 
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities 
Exchange Act of 1934 (``Exchange Act'').\3\ The Advance Notice was 
published for comment in the Federal Register on January 2, 2018.\4\ 
The Commission received one comment on the Advance Notice. The comment 
letter was supportive, but brief, and without specific reasons for the 
view.\5\ This publication serves as notice that the Commission does not 
object to the changes set forth in the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight 
Council designated NSCC a systemically important financial market 
utility on July 18, 2012. See Financial Stability Oversight Council 
2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, NSCC is 
required to comply with the Clearing Supervision Act and file 
advance notices with the Commission. See 12 U.S.C. 5465(e).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78s(b)(1).
    \4\ Securities Exchange Act Release No. 82403 (December 26, 
2017), 83 FR 176 (January 2, 2017) (File No. SR-NSCC-2017-807) 
(``Notice'').
    \5\ See letter from Alexandre Blais, dated January 1, 2018 
(``[I] am all for this.'').
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I. Description of the Advance Notice

    The Advance Notice is a proposal by NSCC to address liquidity risk 
that is present when NSCC acts as central counterparty (``CCP'') to a 
transaction with an NSCC member. Liquidity risk can arise for NSCC 
where there is a member default and NSCC must continue to complete end-
of-day settlement on an ongoing basis. In such circumstances, NSCC will 
need to complete settlement of guaranteed transactions by delivering to 
its other members cash or securities on the failing member's behalf 
from the date of default through the remainder of the settlement cycle.

[[Page 6913]]

    One of the resources NSCC uses to manage liquidity risk arising 
from a member default is its Prefunded Liquidity Program, which NSCC 
established through a previous advance notice to which the Commission 
did not object.\6\ Currently, the Prefunded Liquidity Program provides 
NSCC with the authority to raise up to $5 billion through the private 
placement of unsecured debt (commercial paper and extendible notes, 
collectively ``Notes'').\7\ NSCC holds the cash proceeds from the 
issuance of the Notes in a cash deposit account at the Federal Reserve 
Bank of New York or a bank counterparty that has been approved pursuant 
to the Clearing Agency Investment Policy.\8\ In the event of a default 
by an NSCC member, NSCC can use the cash to manage the resultant 
liquidity need and complete settlement.\9\ NSCC may not access or use 
the cash for any other purpose.\10\
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    \6\ Securities Exchange Act Release No. 75730 (August 19, 2015), 
80 FR 51638 (August 25, 2015) (SR-NSCC-2015-802).
    \7\ Notice, 83 FR at 177.
    \8\ Id.
    \9\ Id. at 178.
    \10\ Id.
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    NSCC filed the Advance Notice to increase the authorized amount 
under its Prefunded Liquidity Program. Under the Advance Notice, NSCC 
seeks to increase the amount available to it under the Prefunded 
Liquidity Program from $5 billion to $10 billion.\11\ According to 
NSCC, the proposed expanded authorized amount under NSCC's Prefunded 
Liquidity Program would enable NSCC to continue to maintain a 
sufficient amount of liquid resources in compliance with its regulatory 
requirements through the issuance of additional Notes in the event its 
liquidity needs increase.\12\ Specifically, NSCC stated that it would 
provide NSCC with the flexibility to reduce its reliance on its credit 
facility, as necessary.\13\ NSCC has observed varying levels of 
interest by the credit markets in recent years and stated that it 
cannot be certain that it will be able to continue to renew the credit 
facility at levels that would meet its projected liquidity needs in 
future years.\14\
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    \11\ Id. at 177.
    \12\ Id.
    \13\ Id.; see Securities Exchange Act Release No. 80605 (May 5, 
2017), 82 FR 21850 (May 10, 2017) (SR-DTC-2017-802; SR-NSCC-2017-
802) (authorizing NSCC to enter into a 364-day credit facility with 
a consortium of banks).
    \14\ Notice, 83 FR at 177.
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II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act is instructive: To mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for systemically 
important financial market utilities and strengthening the liquidity of 
systemically important financial market utilities.\15\
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    \15\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \16\ authorizes 
the Commission to prescribe regulations containing risk-management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency. Section 805(b) of the 
Clearing Supervision Act \17\ provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a):
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    \16\ 12 U.S.C. 5464(a)(2).
    \17\ 12 U.S.C. 5464(b).
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     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and 
default policies and procedures, among others areas.\18\
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    \18\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk-management standards under Section 
805(a)(2) of the Clearing Supervision Act \19\ and the Exchange Act 
(``Rule 17Ad-22'').\20\ Rule 17Ad-22 requires each covered clearing 
agency, among other things, to establish, implement, maintain, and 
enforce written policies and procedures that are reasonably designed to 
meet certain minimum requirements for operations and risk-management 
practices on an ongoing basis.\21\ As such, it is appropriate for the 
Commission to review advance notices for consistency with the 
objectives and principles for risk-management standards described in 
Section 805(b) of the Clearing Supervision Act \22\ and Rule 17Ad-
22.\23\
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    \19\ 12 U.S.C. 5464(a)(2).
    \20\ 15 U.S.C. 78q-1.
    \21\ 17 CFR 240.17Ad-22.
    \22\ 12 U.S.C. 5464(b).
    \23\ 17 CFR 240.17Ad-22.
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    The Commission believes the proposal in the Advance Notice is 
consistent with the objectives and principles described in Section 
805(b) of the Clearing Supervision Act,\24\ and Rule 17Ad-22, in 
particular Rule 17Ad-22(e)(7)(i) and (ii),\25\ as described in detail 
below.
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    \24\ 12 U.S.C. 5464(b).
    \25\ 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes the Advance Notice proposal is consistent 
with the stated objectives and principles of Section 805(b) of the 
Clearing Supervision Act.\26\ Specifically, the Commission believes 
that the changes proposed in the Advance Notice are consistent with 
promoting robust risk management in the area of liquidity risk and 
promoting safety and soundness.
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    \26\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposed expanded authorized 
amount under NSCC's Prefunded Liquidity Program would enhance NSCC's 
ability to access liquid resources that, in turn, would allow NSCC to 
continue to meet its settlement obligations to its clearing members in 
a timely fashion, thereby promoting robust liquidity risk management at 
NSCC. While the Commission notes that the proposed expansion permits 
NSCC to increase its reliance upon the Prefunded Liquidity Program, and 
hence the financial risks that accompany such reliance (e.g., maturity 
risk, rollover risk, and interest rate risk), NSCC has a variety of 
liquidity risk management tools at its disposal \27\ and the Commission 
believes that the ability of NSCC to increase the Prefunded Liquidity 
Program, in lieu of or in combination with NSCC's other liquidity 
tools, promotes NSCC's ability to manage liquidity risk through an 
overall diversified range of risk management tools.
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    \27\ NSCC's other liquidity tools include: (1) NSCC's Clearing 
Fund (consisting of cash and U.S. treasury securities); (2) NSCC's 
committed 364-day credit facility with a consortium of banks (``Line 
of Credit''); and (3) Supplemental Liquidity Deposits, which are 
cash deposits designed to cover the heightened liquidity exposure 
arising around monthly option expiry periods by members whose 
activity would pose the largest liquidity exposure to NSCC during 
such periods.
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    The Commission also believes that expanding the authorized amount 
under NSCC's Prefunded Liquidity Program from $5 billion to $10 
billion, as proposed, would promote safety and soundness by enabling 
NSCC to obtain additional liquid resources to cover a liquidity gap 
that could arise in the event of a member default. By covering such a 
gap, the proposal bolsters NSCC's ability to meet its settlement 
obligations in the event of a member default, thereby reducing the risk 
of loss contagion (i.e., the risk of losses arising at other NSCC 
members if NSCC is unable to deliver cash or securities on

[[Page 6914]]

the defaulting member's behalf). Reducing the risk of loss contagion 
during a member default, in turn, enhances the ability of NSCC and its 
clearing members to continue to provide stability and safety to the 
financial markets that they serve. Therefore, by enhancing NSCC's 
ability to address losses and liquidity pressures that otherwise might 
cause financial distress to NSCC or its clearing members, the Advance 
Notice promotes safety and soundness.
    Consistent with the conclusions discussed above, the Commission 
also believes that NSCC's proposal is consistent with reducing systemic 
risks and supporting the stability of the broader financial system. 
Reducing the risk of loss contagion would attenuate the transmission of 
financial shocks from defaulting members to non-defaulting members. 
Accordingly, the proposed changes would support the stability of the 
broader financial system. Thus, the Commission believes that the 
proposal contained in the Advance Notice is consistent with the stated 
objectives and principles of Section 805(b) of the Clearing Supervision 
Act.

B. Consistency With Rules 17Ad-22(e)(7)(i) and (ii)

    The Commission believes that the changes proposed in the Advance 
Notice are consistent with the requirements of Rules 17Ad-22(e)(7) 
under the Exchange Act. Rule 17Ad-22(e)(7) requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively measure, monitor, and manage 
liquidity risk that arises in or is borne by NSCC, including measuring, 
monitoring, and managing its settlement and funding flows on an ongoing 
and timely basis, and its use of intraday liquidity, as specified in 
the rule.
    In particular, Rule 17Ad-22(e)(7)(i) under the Exchange Act 
requires that each covered clearing agency establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to ``effectively measure, monitor, and manage the liquidity 
risk that arises in or is borne by [it], including measuring, 
monitoring, and managing its settlement and funding flows on an ongoing 
and timely basis, and its use of intraday liquidity by . . . 
[m]aintaining sufficient liquid resources at the minimum in all 
relevant currencies to effect same-day . . . settlement of payment 
obligations with a high degree of confidence under a wide range of 
foreseeable stress scenarios that includes, but is not limited to, the 
default of the participant family that would generate the largest 
aggregate payment of obligation for the covered clearing agency in 
extreme but plausible conditions.''
    As described above, the proposed expansion of the authorized amount 
under NSCC's Prefunded Liquidity Program would increase the readily-
available liquidity resources available to NSCC to continue to meet its 
liquidity obligations in a timely fashion in the event of a member 
default. The increased funds could thereby help maintain sufficient 
liquidity resources to effect same-day settlement of payment 
obligations with a high degree of confidence under a wide range of 
foreseeable stress scenarios. Additionally, the increased size of the 
Prefunded Liquidity Program is designed to help ensure that NSCC has 
sufficient, readily-available qualifying liquid resources to meet the 
cash settlement obligations of its largest family of affiliated 
members. Therefore, the Commission finds that the proposal is 
consistent with Rule 17Ad-22(e)(7)(i).
    Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires each covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to ``effectively measure, 
monitor, and manage the liquidity risk that arises in or is borne by 
[it], including measuring, monitoring, and managing its settlement and 
funding flows on an ongoing and timely basis, and its use of intraday 
liquidity by . . . holding qualifying liquid resources sufficient'' to 
satisfy payment obligations owed to clearing members. Rule 17Ad-
22(a)(14) under the Exchange Act defines ``qualifying liquid 
resources'' to include, among other things, cash held either at the 
central bank of issue or at creditworthy commercial banks.
    As described above, the proposed expansion of the authorized amount 
under NSCC's Prefunded Liquidity Program would enable NSCC to hold 
additional cash proceeds from the issuance of the Notes in a cash 
deposit account at the Federal Reserve Bank of New York or a bank 
counterparty that has been approved pursuant to the Clearing Agency 
Investment Policy. Because the funds would be held at the Federal 
Reserve Bank of New York or a bank counterparty, they would qualify as 
qualifying liquid resource. Therefore, the Commission believes that the 
proposal is consistent with Rule 17Ad-22(e)(7)(ii).

III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\28\ that the Commission does not object to 
the Advance Notice (SR-NSCC-2017-807) and that NSCC is authorized to 
implement the proposed change as of the date of this notice.
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    \28\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03094 Filed 2-14-18; 8:45 am]
BILLING CODE 8011-01-P