[Federal Register Volume 85, Number 126 (Tuesday, June 30, 2020)]
[Notices]
[Pages 39253-39255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14008]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89141; File No. SR-NSCC-2020-011]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed 
Rule Change To Modify the Clearing Fund Maintenance Fee

June 24, 2020.
    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 June 16, 2020, 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)(2) 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)(2).
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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 
Fund Maintenance Fee (``Maintenance Fee'') set forth in Addendum A of 
the NSCC Rules & Procedures (``Rules'').\5\
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    \5\ Capitalized terms not defined herein are defined in the 
Rules available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
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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 purpose of the proposed rule change is to modify the existing 
Maintenance Fee set forth in Addendum A of the Rules.\6\
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    \6\ Addendum A, Rules, supra note 5.
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Maintenance Fee
    The Maintenance Fee was implemented in 2016 pursuant to a proposed 
rule change (``2016 Rule Change'') in order to (i) diversify NSCC's 
revenue sources, mitigating NSCC's dependence on revenues driven by 
trading volumes, and (ii) add a stable revenue source that would 
contribute to NSCC's operating margin by offsetting increasing costs 
and expenses.\7\ The fee is charged to all NSCC Members and Limited 
Members that are required to make deposits to the NSCC Clearing Fund 
(collectively, ``Members'') in proportion to the Member's average 
monthly cash deposit to the Clearing Fund.
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    \7\ Securities Exchange Act Release No. 78525 (August 9, 2016), 
81 FR 54146 (August 15, 2016) (SR-NSCC-2016-002).
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    Since the 2016 Rule Change, the Maintenance Fee has been calculated 
monthly, in arrears, as the product of (A) 0.25 percent and (B) the 
average of the Member's actual cash deposit to the NSCC Clearing Fund 
as of the end of each day of the month, multiplied by the number of 
days in that month and divided by 360. However, by its terms, the fee 
is waived if the monthly rate of return on NSCC's investment of the 
cash portion of the Clearing Fund was less than 0.25 percent for the 
month (``Waiver Provision'').
    NSCC represents that the Waiver Provision was included for the 
benefit of Members. NSCC believed that if its monthly rate of return on 
the investment of cash from the Clearing Fund was less than 0.25 
percent, then Members would likely be experiencing similarly low 
interest income on their deposits, including excess reserves, if 
applicable; in which case, NSCC would waive the fee. Although this 
approach exposed NSCC to the risk of not receiving revenue from the 
Maintenance Fee at a time of increased costs, NSCC did not believe that 
such an exposure would be common, significant, or long-term. Moreover, 
at the time of adoption, NSCC's default liquidity resources were not as 
diversified and robust as they are now, nor were such resources as 
costly or expensive to secure and maintain, as described below.
Increased Costs and Expenses
    Due to the coronavirus global pandemic and overall reaction by the 
financial markets, NSCC's cost of funding has risen sharply in 2020, 
particularly for three of NSCC's key

[[Page 39254]]

default liquidity resources: NSCC's committed 364-day line-of-credit 
facility with a consortium of banks (``LOC''); \8\ the proceeds of the 
issuance and private placement of short-term, unsecured notes in the 
form of commercial paper and extendable notes (``CP''); \9\ and 
proceeds of the issuance of medium-term notes (``MTNs'').\10\ This 
year's annual renewal of the LOC cost substantially more than past 
renewals due to a significant fee increase that NSCC had to pay to the 
lenders in order for NSCC to reach its target commitment size in the 
current economic environment. Meanwhile, for the CP program and the 
MTNs, the spread between the CP rates and MTN coupons that NSCC must 
pay and the interest it earns on the cash proceeds from those liquidity 
resources has widened significantly, making the resources considerably 
more expensive than they have been or would have been in past economic 
conditions.
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    \8\ See Securities Exchange Act Release No. 80605 (May 5, 2017), 
82 FR 21850 (May 10, 2017) (SR-NSCC-2017-802).
    \9\ See Securities Exchange Act Release Nos. 75730 (August 19, 
2015), 80 FR 51638 (August 25, 2015) (SR-NSCC-2015-802); 82676 
(February 9, 2018), 83 FR 6912 (February 15, 2018) (SR-NSCC-2017-
807).
    \10\ See Securities Exchange Act Release No. 87912 (January 8, 
2020), 85 FR 2187 (January 14, 2020) (SR-NSCC-2019-802).
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    Collectively, the unexpected increases in cost and expense to 
secure and maintain those default liquidity resources has added 
millions of dollars to NSCC's non-operating expense. If unaddressed, 
the increases could negatively impact NSCC's 2020 financial results and 
its access to default liquidity resources. A deteriorating operating 
margin could jeopardize NSCC's credit ratings. A downgrade to an NSCC 
credit rating could further increase such costs and expenses, but more 
importantly, could reduce the overall availability of default liquidity 
resources to NSCC, if investors or lending banks reduce their current 
levels of engagement with NSCC.
Modifications to the Maintenance Fee
    To help address this immediate issue and better position NSCC going 
forward, with respect to its ability to fund its default liquidity 
resources in various economic environments, as well as to improve the 
overall functioning of the Maintenance Fee, NSCC is modifying the fee 
in three ways. First, NSCC is removing the Waiver Provision. Second, 
instead of using the fixed rate of 0.25 percent when calculating the 
Maintenance Fee, NSCC will calculate the fee using the corresponding 
month's average Interest Rate on Excess Reserves (i.e., the IOER rate) 
that is determined by the Board of Governors of the Federal Reserve 
System (``Federal Reserve'').\11\ Third, NSCC is setting a ceiling of 
0.25 percent and a floor of 0.00 percent on the IOER rate used in the 
fee calculation.
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    \11\ Policy Tools, Interest on Required Reserve Balances and 
Excess Balances, https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm.
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    NSCC is removing the Waiver Provision so that NSCC will be able to 
generate revenue from the Maintenance Fee even if NSCC's monthly rate 
of return on the investment of cash deposits from the Clearing Fund is 
less than 0.25 percent. The ability to generate such revenue under such 
circumstances is important in helping NSCC offset its costs and 
expenses in any economic environment.
    NSCC is replacing the current fixed rate of 0.25 percent with the 
month's average IOER rate when calculating the Maintenance Fee because 
the IOER rate is (i) publicly available, well established, and a widely 
used benchmark (i.e., the rate is transparent); (ii) determined by the 
Federal Reserve (i.e., the rate is reliable); and (iii) the same rate 
that NSCC receives on the cash deposits it holds in its cash deposit 
account at the Federal Reserve Bank of New York (i.e., the rate is 
impartial).
    NSCC is setting a ceiling of 0.25 percent on the IOER rate that it 
uses to calculate the Maintenance Fee so that Members will not be 
charged an amount greater than what is possible under the original 
calculation. However, it is setting a floor of 0.00 percent so if the 
IOER rate turns negative, NSCC will not owe Members an amount based on 
the calculation.
Changes to the Rules
    To effectuate the changes described above, Subsection G (Clearing 
Fund Maintenance Fee) of Section V (Pass-Through and Other Fees) of 
Addendum A (Fee Structure) to the Rules will be modified to (i) remove 
the Waiver Provision, (ii) replace the existing fixed rate of 0.25 
percent with the month's average IOER rate, and (iii) set a ceiling of 
0.25 percent and a floor of 0.00 percent on the IOER rate used in the 
fee's calculation.
Implementation Timeframe
    The above described changes to the Maintenance Fee will take effect 
immediately upon filing with the Commission, with the next assessment 
of the fee using those changes being for the month of July 2020.
2. Statutory Basis
    Section 17A(b)(3)(D) of the Act \12\ requires that NSCC's Rules 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its participants. NSCC believes that the changes to 
the Maintenance Fee are consistent with this provision of the Act.
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    \12\ 15 U.S.C. 78q-1(b)(3)(D).
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    As described above, the proposal will modify the existing 
Maintenance Fee in three ways: (i) Removing the Waiver Provision, (ii) 
calculating the fee using the month's average IOER rate, instead of the 
current fixed rate of 0.25 percent, and (iii) setting a ceiling of 0.25 
percent and a floor of 0.00 percent on the IOER rate used in the 
calculation.
    Because these changes do not alter how the Maintenance Fee is 
currently allocated (i.e., charged) to Members, NSCC believes the fee 
will continue to be equitably allocated. More specifically, as 
mentioned above, the Maintenance Fee is and will continue to be charged 
to all Members in proportion to the Member's average monthly cash 
deposit to the Clearing Fund. As such, and as is currently the case, 
Members that make greater use of NSCC's guaranteed services or which 
have activity in those services that present greater risk to NSCC will 
generally be subject to a larger Maintenance Fee because such Members 
will typically be required to maintain larger Clearing Fund deposits 
pursuant to the Rules.\13\ Conversely, Members that use NSCC's 
guaranteed services less or which have activity that presents less risk 
will generally be subject to a smaller Maintenance Fee because such 
Members will typically be required to maintain smaller Clearing Fund 
deposits pursuant to the Rules.\14\ The described changes do not adjust 
that allocation. For this reason, NSCC believes the Maintenance Fee 
will continue to be equitably allocated among Members.
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    \13\ See Rule 4 and Procedure XV, Rules, supra note 5.
    \14\ Id.
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    Similarly, NSCC believes that the Maintenance Fee will continue to 
be a reasonable fee under the described changes. First, use of the IOER 
rate in calculating the fee is reasonable because, as described above, 
the IOER rate is (i) transparent, (ii) reliable, and (iii) impartial. 
Second, use of the IOER rate, coupled with a ceiling of 0.25 percent, 
will not only ensure that Members are not assessed an amount greater 
than the original calculation, but that Members will be charged less at 
times when the IOER rate is less than 0.25 percent. Third, instituting 
a floor of

[[Page 39255]]

0.00 percent will avoid the unreasoned situation of NSCC having to pay 
Members based on calculating the fee with a negative IOER rate. 
Finally, although removal of the Waiver Provision means that Members 
could be assessed a Maintenance Fee at times when they may not 
otherwise have been assessed the fee, the removal of this provision 
enables NSCC to collect needed revenue from the fee in almost any 
economic environment. For this reason, NSCC believes the Maintenance 
Fee will continue to be reasonable.
    Based on the forgoing, NSCC believes the proposed rule change is 
consistent with Section 17A(b)(3)(D).\15\
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    \15\ 15 U.S.C. 78q-1(b)(3)(D).
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the changes to the Maintenance Fee will 
have an impact on competition. First, as described above, the 
Maintenance Fee is charged ratably based on Members' use of NSCC's 
guaranteed services, as reflected in Members' cash deposits to the 
Clearing Fund. Thus, the fee is designed to be reflective of each 
Member's individual activity at NSCC.
    Second, NSCC does not believe the changes to set a ceiling of 0.25 
percent and a floor of 0.00 percent on the IOER rate used in 
calculating the Maintenance Fee will have any impact on competition 
because (i) a ceiling of 0.25 percent means that Members cannot be 
assessed an amount greater than what could have been assessed under the 
original calculation of the fee, and (ii) a floor of 0.00 percent means 
that NSCC will not have to pay Members if the fee were to be calculated 
with a negative IOER rate. In other words, both of these changes 
maintain the status quo in how the fee operates in these two respects.
    Third, appreciating that the value of a dollar is not consistent 
for each Member, the change to remove the Waiver Provision could be a 
perceived burden on competition because Members could be assessed a fee 
at a time when they would not otherwise have been under the original 
calculation. However, the change to calculate the Maintenance Fee using 
the month's average IOER rate, instead of the current fixed rate of 
0.25 percent, could relieve a competitive burden or promote competition 
because Members could be assessed a smaller fee than what may have been 
assessed using the original calculation. Members could choose to direct 
such savings to competitive aspects of their business. Therefore, in 
making these two changes together, NSCC believes the competitive 
aspects are possibly offsetting.
    Notwithstanding the above, if removal of the Waiver Position, and 
the resulting imposition of the Maintenance Fee at a time when a Member 
would not have otherwise been assessed the fee, would prove to be a 
greater competitive burden for any one Member than the counterbalancing 
aspects of calculating the fee using the month's average IOER rate, 
instead of the current fixed rate of 0.25 percent, NSCC believes such a 
burden would be necessary and appropriate. The burden would be 
necessary because it is essential that NSCC offset some of its costs 
and expenses with revenue generated from the Maintenance Fee. As 
described above, not doing so could adversely affect NSCC's credit 
ratings, which could further increase funding or, possibly, decrease 
the availability of crucial liquidity resources for NSCC. The burden 
would be appropriate because, as described above, the Maintenance Fee 
is calculated, using a balanced formula, to assess a fee that is 
reflective of the Member's use of NSCC's guaranteed services, so that 
NSCC can defray some of its costs and expenses in providing those 
services.

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

    NSCC has not received or solicited any written comments relating to 
this proposal. NSCC will notify the Commission of any written comments 
received by NSCC.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \16\ and paragraph (f) of Rule 19b-4 
thereunder.\17\ 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.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f).
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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-2020-011 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-2020-011. 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-2020-011 and should be submitted on 
or before July 21, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14008 Filed 6-29-20; 8:45 am]
BILLING CODE 8011-01-P