[Federal Register Volume 85, Number 29 (Wednesday, February 12, 2020)]
[Notices]
[Pages 8046-8048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02790]



[[Page 8046]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88146; File No. SR-NSCC-2019-802]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of No Objection to Advance Notice To Issue Term 
Debt as Part of Its Liquidity Risk Management Framework

February 7, 2020.
    On December 13, 2019, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-NSCC-2019-802 (``Advance Notice'') 
pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, entitled 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\ to issue term debt as part of its Clearing 
Agency Liquidity Risk Management Framework (``Framework''). The Advance 
Notice was published for public comment in the Federal Register on 
January 14, 2020,\4\ and the Commission has received no comments 
regarding the changes proposed in the Advance Notice. This publication 
serves as notice of no objection to the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ Securities Exchange Act Release No. 34-87912 (January 8, 
2020), 85 FR 2187 (January 14, 2020) (File No. SR-NSCC-2019-802) 
(``Notice of Filing'').
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I. The Advance Notice

    NSCC has proposed to raise cash through the periodic issuance and 
private placement of term debt to qualified institutional investors in 
an aggregate amount not to exceed $10 billion, as described in greater 
detail below. The cash from the term debt issuances would supplement 
NSCC's existing default liquidity resources, which collectively provide 
NSCC with liquidity to complete end-of-day settlement in the event of 
the default of an NSCC Member.\5\ Such liquidity resources currently 
include the proceeds from the issuance and private placement of short-
term, unsecured notes in the form of commercial paper and extendable 
notes \6\ and cash that would be obtained by drawing upon NSCC's 
committed 364-day credit facility with a consortium of banks.\7\
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    \5\ Terms not defined herein are defined in NSCC's Rules and 
Procedures (``Rules''), available at http://www.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, 
which include, for example, default in delivering funds or 
securities to NSCC or experiencing such financial or operational 
difficulties for which NSCC determines, in its discretion, that 
restriction on access to services is necessary for its protection 
and for the protection of its Members.
    \6\ See Securities Exchange Act Release Nos. 75730 (August 19, 
2015), 80 FR 51638 (August 25, 2015) (File No. SR-NSCC-2015-802); 
82676 (February 9, 2018), 83 FR 6912 (February 15, 2018) (File No. 
SR-NSCC-2017-807).
    \7\ See Securities Exchange Act Release No. 80605 (May 5, 2017), 
82 FR 21850 (May 10, 2017) (File Nos. SR-DTC-2017-802; SR-NSCC-2017-
802).
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A. General Terms of the Term Debt Issuances

    NSCC expects the average maturity of the term debt would range 
between two and ten years. The term debt would be represented by 
unsecured, unsubordinated and non-convertible medium-term and long-term 
global notes held in the name of The Depository Trust Company 
(``DTC''), or its nominee, Cede & Co.\8\ The notes would be issued and 
transferred only through the book-entry system of DTC.
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    \8\ Supra note 4, at 5.
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    The term debt would be issued to qualified institutional investors 
through private placements and offered in reliance on an exemption from 
registration under Section 4(a)(2) of the Securities Act of 1933.\9\ 
NSCC would be party to certain transaction documents in connection with 
each issuance and private placement, including an indenture with the 
trustee and purchase agreements.\10\ The purchase agreements would each 
be based on the standard form of dealer agreement for similar debt 
issuances, which is published by the Securities Industry and Financial 
Markets Association.
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    \9\ 15 U.S.C. 77d(a)(2).
    \10\ NSCC states that it will engage a trustee and underwriting 
banks to issue the term debt to qualified institutional investors. 
Supra note 4, at 4.
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    NSCC intends to time each debt issuance and stagger maturity dates 
of each issuance in order to ladder the maturities to avoid 
concentrations of maturities. NSCC also would have the ability to make 
use of optional features to call any of the issued term debt, in whole 
or in part, at any time prior to the maturity date of that debt, and 
the issued term debt may contain renewable terms. The term debt would 
be interest bearing at either fixed or floating interest rates that are 
set at market rates customary for such type of debt and reflective of 
the creditworthiness of NSCC.
    Under the proposal, NSCC would be authorized to issue an aggregate 
amount of up to $10 billion in term debt and has represented that it 
expects the average amount issued and outstanding at any time to be 
approximately $2-3 billion, as necessitated by its default liquidity 
needs.\11\ NSCC estimates that each issuance would be in an amount 
between approximately $250 million and $1.5 billion, with an initial 
issuance expected to be approximately $1 billion.
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    \11\ Supra note 4, at 4.
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    NSCC has stated that, in accordance with its Clearing Agency 
Investment Policy, NSCC would hold the proceeds from the issuance of 
term debt in either its cash deposit account at the Federal Reserve 
Bank of New York (``FRBNY'') or in accounts at other creditworthy 
financial institutions.\12\ These amounts would be available to draw to 
complete settlement as needed.
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    \12\ See Securities Exchange Act Release Nos. 79528 (December 
12, 2016), 81 FR 91232 (December 16, 2016) (File Nos. SR-DTC-2016-
007, SR-FICC-2016-005, SR-NSCC-2016-003); 84949 (December 21, 2018), 
83 FR 67779 (December 31, 2018) (File Nos. SR-DTC-2018-012, SR-FICC-
2018-014, SR-NSCC-2018-013) (approving the Clearing Agency 
Investment Policy). NSCC has stated that, in the event that the 
Commission does not object to the Advance Notice, and NSCC then has 
the authority to issue the term debt, NSCC will file a proposed rule 
change with the Commission pursuant to Section 19(b)(1) of the 
Exchange Act, and the rules thereunder, to amend the Clearing Agency 
Investment Policy to include the proceeds of the debt issuance as 
default liquidity funds, within the definition of ``Investable 
Funds,'' as such term is defined therein, and provide that such 
amounts would be held in bank deposits at eligible commercial banks 
or at NSCC's cash deposit account at the FRBNY. See 15 U.S.C. 
78s(b)(1).
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B. NSCC's Liquidity Risk Management

    As a central counterparty (``CCP''),\13\ NSCC occupies an important 
role in the securities settlement system by interposing itself between 
counterparties to financial transactions, becoming the buyer to each 
seller and seller to each buyer to ensure the performance of contract, 
thereby reducing the risk faced by its Members and contributing to 
global financial stability. NSCC's liquidity risk management plays an 
integral part in NSCC's ability to perform its role as a CCP. If a 
Member defaults, NSCC, as CCP, would 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 two 
days for securities that settle on a regular way basis in the U.S. 
markets).
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    \13\ 17 CFR 240.17Ad-22(a)(1).
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    NSCC's Framework sets forth NSCC's liquidity risk management 
strategy to maintain sufficient liquidity resources in order to meet 
the potential funding

[[Page 8047]]

required to settle outstanding transactions of a defaulting Member in a 
timely manner.\14\ The Framework also addresses how NSCC meets its 
requirement to hold qualifying liquid resources, as such term is 
defined in Rule 17Ad-22(a)(14) under the Act,\15\ sufficient to meet 
its minimum liquidity resource requirement in each relevant currency 
for which it has payment obligations owed to its Members.
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    \14\ See Securities Exchange Act Release No. 82377 (December 21, 
2017), 82 FR 61617 (December 28, 2017) (File Nos. SR-DTC-2017-004; 
SR-FICC-2017-008; SR-NSCC-2017-005).
    \15\ 17 CFR 240.17Ad-22(a)(14).
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    NSCC considers each of its existing default liquidity resources to 
be qualifying liquid resources.\16\ These resources include: (1) The 
cash in NSCC's Clearing Fund; \17\ (2) cash that would be obtained by 
drawing upon NSCC's committed 364-day credit facility with a consortium 
of banks; \18\ (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; \19\ and (4) cash proceeds from the issuance and private 
placement of short-term, unsecured notes in the form of commercial 
paper and extendable notes (``Commercial Paper Program'').\20\
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    \16\ Id.
    \17\ See Rule 4 and Procedure XV of the Rules, supra note 14.
    \18\ See Securities Exchange Act Release No. 80605 (May 5, 
2017), 82 FR 21850 (May 10, 2017) (File Nos. SR-DTC-2017-802; SR-
NSCC-2017-802).
    \19\ Supplemental Liquidity Deposits are described in Rule 4A of 
the Rules.
    \20\ See Securities Exchange Act Release Nos. 75730 (August 19, 
2015), 80 FR 51638 (August 25, 2015) (File No. SR-NSCC-2015-802); 
82676 (February 9, 2018), 83 FR 6912 (February 15, 2018) (File No. 
SR-NSCC-2017-807).
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    The proceeds from the term debt issuances would supplement NSCC's 
existing default liquidity resources and provide NSCC with an 
additional resource it may use to meet its liquidity needs, as measured 
pursuant to the Framework.\21\ Further, NSCC would consider the 
proceeds from the term debt issuances to be a qualifying liquid 
resource under the Framework.\22\
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    \21\ Supra note 14. NSCC will file a proposed rule change with 
the Commission pursuant to Section 19(b)(1) of the Exchange Act, and 
the rules thereunder, to amend the Framework to include the proceeds 
of the debt issuance as an additional qualifying liquidity resource 
of NSCC. See supra note 12; 15 U.S.C. 78s(b)(1).
    \22\ Supra note 4, at 7.
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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 SIFMUs and 
strengthening the liquidity of SIFMUs.\23\
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    \23\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act 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.\24\ Section 805(b) of the 
Clearing Supervision Act provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a): \25\
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    \24\ 12 U.S.C. 5464(a)(2).
    \25\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to 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.\26\
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    \26\ 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 and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\27\ The Clearing Agency 
Rules require, among other things, each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for its operations and risk management practices on an 
ongoing basis.\28\ As such, it is appropriate for the Commission to 
review advance notices against the Clearing Agency Rules and the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act. As 
discussed below, 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,\29\ and in the Clearing 
Agency Rules, in particular Rule 17Ad-22(e)(7).\30\
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    \27\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). 
See also Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing 
Agency Standards''). The Commission established an effective date of 
December 12, 2016 and a compliance date of April 11, 2017 for the 
Covered Clearing Agency Standards. NSCC is a ``covered clearing 
agency'' as defined in Rule 17Ad-22(a)(5).
    \28\ Id.
    \29\ Supra note 25.
    \30\ 17 CFR 240.17Ad-22(e)(7).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    For the reasons discussed immediately below, the Commission 
believes that the Advance Notice is consistent with the stated 
objectives and principles of Section 805(b) of the Clearing Supervision 
Act.\31\
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    \31\ Supra note 25.
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    NSCC's issuance of term debt would provide it with an additional 
liquid resource that NSCC could access in the event of a Member 
default, supplementing NSCC's existing default liquidity resources and 
diversifying the type and source of such resources. The Commission 
believes that the proposal to issue term debt up to an aggregate amount 
of $10 billion, and use the proceeds as a default liquidity resource, 
is designed to promote robust liquidity risk management at NSCC by 
diversifying the set of liquid resources available to NSCC in the event 
of a Member default that, in turn, would allow NSCC to continue to meet 
its settlement obligations to its Members in a timely fashion. While 
the Commission notes that the proposed issuance of term debt could 
bring certain financial risks,\32\ the Commission believes that in the 
event such risks were to materialize, the ability of NSCC to use other 
liquidity tools \33\ helps promote NSCC's ability to manage liquidity 
risk through an overall diversified range of risk management tools.
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    \32\ The risks include maturity risk, rollover risk, interest 
rate risk, and financial risk. Supra note 4, at 9-10.
    \33\ 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; (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; and (4) cash 
proceeds from the issuance and private placement of short-term, 
unsecured notes as part of NSCC's Commercial Paper Program. Supra 
note 4, at 7.
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    The Commission also believes that the term debt issuance, as 
proposed and in light of NSCC's current finances and its approach to 
financial risk management, would promote safety and soundness by

[[Page 8048]]

enabling NSCC to obtain additional and diversified liquid resources to 
cover a liquidity gap that could arise in the event of a Member 
default. By covering such a gap, the proposal complements 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 the defaulting Member's behalf). Reducing the risk of 
loss contagion during a Member default, in turn, enhances the ability 
of NSCC and its Members to continue to provide stability and safety to 
the financial markets they serve. Therefore, by enhancing NSCC's 
ability to address losses and liquidity pressures that otherwise might 
cause financial distress to NSCC or its Members, the Advance Notice 
promotes safety and soundness.
    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 proposal would support the 
stability of the broader financial system. Thus, the Commission 
believes that the proposal reflected in the Advance Notice is 
consistent with the stated objectives and principles of Section 805(b) 
of the Clearing Supervision Act.

B. Consistency With Rule 17Ad-22(e)(7)

    The Commission believes that the proposal described in the Advance 
Notice is consistent with the requirements of Rule 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.
1. Consistency With Rule 17Ad-22(e)(7)(i)
    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 issuance of term debt 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 funds could 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 term debt issuance 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).
2. Consistency With Rule 17Ad-22(e)(7)(ii)
    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 issuance of term debt would enable 
NSCC to hold additional cash proceeds from the issuance of the term 
debt in a cash deposit account at the Federal Reserve Bank of New York 
or a bank counterparty that has been approved pursuant to NSCC's 
Clearing Agency Investment Policy. Because the funds would be held at 
the Federal Reserve Bank of New York or a bank counterparty, they would 
be a qualifying liquid resource, as that term is defined in Rule 17Ad-
22(a)(14).\34\ Therefore, the Commission believes that the proposal is 
consistent with Rule 17Ad-22(e)(7)(ii).
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    \34\ 17 CFR 240.17Ad-22(a)(14) (``Qualifying liquid resources 
means, for any covered clearing agency, . . . (i) cash held either 
at the central bank of issue or at creditworthy commercial banks . . 
.'').
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to 
Advance Notice (SR-NSCC-2019-802) and that NSCC is authorized to 
implement the proposed change as of the date of this notice.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-02790 Filed 2-11-20; 8:45 am]
 BILLING CODE 8011-01-P