[Federal Register Volume 85, Number 162 (Thursday, August 20, 2020)]
[Notices]
[Pages 51521-51528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18198]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89558; File No. SR-NSCC-2020-016]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change, as Modified by 
Amendment No. 1, To Introduce the Margin Liquidity Adjustment Charge 
and Include a Bid-Ask Risk Charge in the VaR Charge

August 14, 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 July 30, 2020, National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-NSCC-2020-016. On August 13, 2020, NSCC filed 
Amendment No. 1 to the proposed rule change, to make clarifications and 
corrections to the proposed rule change.\3\ The proposed rule change, 
as modified by Amendment No. 1 (hereinafter, the ``Proposed Rule 
Change''), is described in Items I, II and III below, which Items have 
been prepared primarily by the clearing agency.\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\ Amendment No. 1 made clarifications and corrections to the 
description of the proposed rule change and Exhibits 3 and 5 of the 
filing, and these clarifications and corrections have been 
incorporated, as appropriate, into the description of the proposed 
rule change in Item II below.
    \4\ On July 30, 2020, NSCC filed this proposed rule change as an 
advance notice (SR-NSCC-2020-804) with the Commission 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, 12 U.S.C. 5465(e)(1), and Rule 
19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). On August 
13, 2020, NSCC filed Amendment No. 1 to the advance notice to make 
similar clarifications and corrections to the advance notice. A copy 
of the advance notice, as modified by Amendment No. 1 (hereinafter, 
``Advance Notice'') is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.

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[[Page 51522]]

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to NSCC's Rules 
& Procedures (``Rules'') to (1) introduce a new component of the 
Clearing Fund, the Margin Liquidity Adjustment (``MLA'') charge, and 
(2) enhance the calculation of the volatility component of the Clearing 
Fund formula that utilizes a parametric Value-at-Risk (``VaR'') model 
(defined for purposes of this filing as the ``VaR Charge,'' and 
described in more detail in Item II(A)1(i) below) by including a bid-
ask spread risk charge, as described in greater detail below.\5\
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    \5\ Capitalized terms not defined herein are defined in the 
Rules, available at http://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
    NSCC is proposing to enhance its Clearing Fund methodology by (1) 
introducing a new component, the MLA charge, which would be calculated 
to address the risk presented to NSCC when a Member's portfolio 
contains large Net Unsettled Positions \6\ in a particular group of 
securities with a similar risk profile or in a particular asset type 
(referred to as ``asset groups''), and (2) enhancing the calculation of 
the VaR Charge by including a bid-ask spread risk charge, as described 
in more detail below.\7\
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    \6\ ``Net Unsettled Positions'' and ``Net Balance Order 
Unsettled Positions'' refer to net positions that have not yet 
passed their settlement date or did not settle on their settlement 
date, and are referred to collectively in this filing as Net 
Unsettled Positions. See Procedure XV (Clearing Fund Formula and 
Other Matters) of the Rules, id.
    \7\ The results of a study of the potential impact of adopting 
the proposed changes have been provided to the Commission.
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(i) Overview of the Required Fund Deposit and NSCC's Clearing Fund
    As part of its market risk management strategy, NSCC manages its 
credit exposure to Members by determining the appropriate Required Fund 
Deposits to the Clearing Fund and monitoring its sufficiency, as 
provided for in the Rules.\8\ The Required Fund Deposit serves as each 
Member's margin.
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    \8\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters), supra note 4. NSCC's market risk 
management strategy is designed to comply with Rule 17Ad-22(e)(4) 
under the Act, where these risks are referred to as ``credit 
risks.'' 17 CFR 240.17Ad-22(e)(4).
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    The objective of a Member's Required Fund Deposit is to mitigate 
potential losses to NSCC associated with liquidating a Member's 
portfolio in the event NSCC ceases to act for that Member (hereinafter 
referred to as a ``default'').\9\ The aggregate of all Members' 
Required Fund Deposits constitutes the Clearing Fund of NSCC. NSCC 
would access its Clearing Fund should a defaulting Member's own 
Required Fund Deposit be insufficient to satisfy losses to NSCC caused 
by the liquidation of that Member's portfolio.
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    \9\ The Rules identify when NSCC may cease to act for a Member 
and the types of actions NSCC may take. For example, NSCC may 
suspend a firm's membership with NSCC or prohibit or limit a 
Member's access to NSCC's services in the event that Member defaults 
on a financial or other obligation to NSCC. See Rule 46 
(Restrictions on Access to Services) of the Rules, supra note 4.
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    Pursuant to the Rules, each Member's Required Fund Deposit amount 
consists of a number of applicable components, each of which is 
calculated to address specific risks faced by NSCC, as identified 
within Procedure XV of the Rules.\10\ The volatility component of each 
Member's Required Fund Deposit is designed to measure market price 
volatility and is calculated for Members' Net Unsettled Positions. The 
volatility component is designed to capture the market price risk 
associated with each Member's portfolio at a 99th percentile level of 
confidence. The VaR Charge is the volatility component applicable to 
most Net Unsettled Positions,\11\ and usually comprises the largest 
portion of a Member's Required Fund Deposit. Procedure XV of the Rules 
currently provides that the VaR Charge shall be calculated in 
accordance with a generally accepted portfolio volatility margin model 
utilizing assumptions based on historical data as NSCC deems reasonable 
and a volatility range that NSCC deems appropriate.\12\
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    \10\ Supra note 4.
    \11\ As described in Procedure XV, Section I(A)(1)(a)(ii), (iii) 
and (iv), and Section I(A)(2)(a)(ii), (iii) and (iv) of the Rules, 
Net Unsettled Positions in certain securities are excluded from the 
VaR Charge and instead charged a volatility component that is 
calculated by multiplying the absolute value of those Net Unsettled 
Positions by a percentage. Supra note 4.
    \12\ Procedure XV, Section I(A)(1)(a)(i) and Section 
I(A)(2)(a)(i) of the Rules, supra note 4.
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    NSCC regularly assesses market and liquidity risks as such risks 
relate to its margining methodologies to evaluate whether margin levels 
are commensurate with the particular risk attributes of each relevant 
product, portfolio, and market. The proposed changes to include the MLA 
charge to its Clearing Fund methodology and to enhance the VaR Charge 
by including a bid-ask spread risk charge, as described below, are the 
result of NSCC's regular review of the effectiveness of its margining 
methodology.
(ii) Overview of Liquidation Transaction Costs and Proposed Changes
    Each of the proposed changes addresses a similar, but separate, 
risk that NSCC faces increased transaction costs when it liquidates the 
Net Unsettled Positions of a defaulted Member due to the unique 
characteristics of that Member's portfolio. The transaction costs to 
NSCC to liquidate a defaulted Member's portfolio include both market 
impact costs and fixed costs. Market impact costs are the costs due to 
the marketability of a security, and generally increase when a 
portfolio contains large Net Unsettled Positions in a particular group 
of securities with a similar risk profile or in a particular asset 
type, as described more below. Fixed costs are the costs that generally 
do not fluctuate and may be caused by the bid-ask spread of a 
particular security. The bid-ask spread of a security accounts for the 
difference between the observed market price that a buyer is willing to 
pay for that security and the observed market price that a seller is 
willing to sell that security.
    The transaction cost to liquidate a defaulted Member's portfolio is 
currently captured by the measurement of market risk through the 
calculation of the applicable volatility charge.\13\ The proposed 
changes would supplement and enhance the current measurement of this 
market risk to address situations where the characteristics of the

[[Page 51523]]

defaulted Member's portfolio could cause these costs to be higher than 
the amount collected for the applicable volatility charge.
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    \13\ The calculation of the VaR Charge and the haircut-based 
volatility charge are described in Sections I.(A)(1)(a) and 
I.(A)(2)(a) of Procedure XV of the Rules. Supra note 4. The 
methodologies for these calculations and how they are designed to 
address risks faced by NSCC have been described in recent proposed 
rule change and advance notice filings. See Securities Exchange Act 
Release Nos. 82780 (February 26, 2018), 82 FR 9035 (March 2, 2018) 
(File No. SR-NSCC-2017-808); 82781 (February 26, 2018), 82 FR 9042 
(March 2, 2018) (File No. SR-NSCC-2017-020).
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    First, as described in more detail below, the MLA charge is 
designed to address the market impact costs of liquidating a defaulted 
Member's portfolio that may increase when that portfolio includes large 
Net Unsettled Positions in a particular group of securities with a 
similar risk profile or in a particular asset type. These positions may 
be more difficult to liquidate because a large number of securities 
with similar risk profiles could reduce the marketability of those 
large Net Unsettled Positions, increasing the market impact costs to 
NSCC. As described below, the MLA charge would supplement the 
applicable volatility charge.
    Second, as described in more detail below, the bid-ask spread risk 
charge would address the risk that the transaction costs of liquidating 
a defaulted Member's Net Unsettled Positions may increase due to the 
fixed costs related to the bid-ask spread. As described below, this 
proposed change would be incorporated into, and, thereby, enhance the 
current measure of transaction costs through, the VaR Charge.
(iii) Proposed Margin Liquidity Adjustment Charge
    In order to address the risks of an increased market impact cost 
presented by portfolios that contain large Net Unsettled Positions in 
the same asset group, NSCC is proposing to introduce a new component to 
the Clearing Fund formula, the MLA charge.
    As noted above, a Member portfolio with large Net Unsettled 
Positions in a particular group of securities with a similar risk 
profile or in a particular asset type may be more difficult to 
liquidate in the market in the event the Member defaults because a 
concentration in that group of securities or in an asset type could 
reduce the marketability of those large Net Unsettled Positions. 
Therefore, such portfolios create a risk that NSCC may face increased 
market impact cost to liquidate that portfolio in the assumed margin 
period of risk of three business days at market prices.
    The proposed MLA charge would be calculated to address this 
increased market impact cost by assessing sufficient margin to mitigate 
this risk. As described below, the proposed MLA charge would be 
calculated for different asset groups, and subgroups for the equities 
asset group. Essentially, the calculation is designed to compare the 
total market value of a Net Unsettled Position in a particular asset 
group or subgroup, which NSCC would be required to liquidate in the 
event of a Member default, to the available trading volume of that 
asset group or equities subgroup in the market.\14\ If the market value 
of the Net Unsettled Position is large, as compared to the available 
trading volume of that asset group or subgroup, then there is an 
increased risk that NSCC would face additional market impact costs in 
liquidating that position in the event of a Member default. Therefore, 
the proposed calculation would provide NSCC with a measurement of the 
possible increased market impact cost that NSCC could face when it 
liquidates a large Net Unsettled Position in a particular asset group 
or subgroup.
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    \14\ NSCC would determine average daily trading volume by 
reviewing data that is made publicly available by the Securities 
Industry and Financial Markets Association (``SIFMA''), at https://www.sifma.org/resources/archive/research/statistics.
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    Rather than calculate the market impact cost for each CUSIP, NSCC's 
MLA charge would estimate market impact cost at the portfolio-level 
using aggregated volume data. For example, as described in greater 
detail below, the calculation of market impact cost would include a 
measurement of the gross market value of the portfolio. Given the vast 
number of CUSIPs processed by NSCC, this approach is simpler and is 
expected to result in more predicable calculations of the MLA charge.
    To calculate the MLA charge, NSCC would categorize securities into 
separate asset groups, which have similar risk profiles--(1) equities 
\15\ (excluding equities defined as Illiquid Securities pursuant to the 
Rules),\16\ (2) Illiquid Securities, (3) unit investment trusts, or 
UITs, (4) municipal bonds (including municipal bond exchange-traded 
products, or ``ETPs''), and (5) corporate bonds (including corporate 
bond ETPs). NSCC would then further segment the equities asset group 
into the following subgroups: (i) Micro-capitalization equities, (ii) 
small capitalization equities, (iii) medium capitalization equities, 
(iv) large capitalization equities, (v) treasury ETPs, and (vi) all 
other ETPs.\17\
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    \15\ NSCC would exclude long positions in Family-Issued 
Securities, as defined in Rule 1 (Definitions) of the Rules, from 
the MLA charge. NSCC believes the margin charge applicable to long 
Net Unsettled Positions in Family-Issued Securities pursuant to 
Sections I.(A)(1)(a)(iv) and (2)(a)(iv) of Procedure XV of the Rules 
provides adequate mitigation of the risks presented by those Net 
Unsettled Positions, such that an MLA charge would not be triggered. 
Supra note 4.
    \16\ See Rule 1 (Definitions), supra note 4.
    \17\ Initially, the market capitalization categorizations would 
be: (i) micro-capitalization equities would be less than $300 
million, (ii) small capitalization equities would be equal to or 
greater than $300 million and less than $2 billion, (iii) medium 
capitalization equities would be equal to or greater than $2 billion 
and less than $10 billion, and (iv) large capitalization equities 
would be equal to or greater than $10 billion. In determining the 
range of these market capitalization categorizations, NSCC would 
consult publications issued by sources it deems appropriate. NSCC 
would review these categories annually and any changes that NSCC 
deems appropriate would be subject to NSCC's model risk management 
governance procedures set forth in the Clearing Agency Model Risk 
Management Framework (``Model Risk Management Framework''). See 
Securities Exchange Act Release Nos. 81485 (August 25, 2017), 82 FR 
41433 (August 31, 2017) (File No. SR-NSCC-2017-008); 84458 (October 
19, 2018), 83 FR 53925 (October 25, 2018) (File No. SR-NSCC-2018-
009); 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (File No. SR-
NSCC-2020-008).
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    NSCC would first calculate a measurement of market impact cost for 
each asset group and equities subgroup for which a Member has Net 
Unsettled Positions in its portfolio. As described above, the 
calculation of an MLA charge is designed to measure the potential 
additional market impact cost to NSCC of closing out a large Net 
Unsettled Position in that particular asset group or equities subgroup.
Market Impact Cost Calculation for Market Capitalization Subgroups of 
Equities Asset Group
    The market impact cost for each Net Unsettled Position in a market 
capitalization subgroup of the equities asset group would be calculated 
by multiplying four components: (1) An impact cost coefficient that is 
a multiple of the one-day market volatility of that subgroup and is 
designed to measure impact costs, (2) the gross market value of the Net 
Unsettled Position in that subgroup, (3) the square root of the gross 
market value of the Net Unsettled Position in that subgroup in the 
portfolio divided by an assumed percentage of the average daily trading 
volume of that subgroup, and (4) a measurement of the concentration of 
the Net Unsettled Position in that subgroup in the portfolio (as 
described in greater detail below).\18\
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    \18\ See supra note 13.
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    NSCC also represents that its measurement of the concentration of 
the Net Unsettled Position in the portfolio would include aggregating 
the relative weight of each CUSIP in that Net Unsettled Position 
relative to the weight of that CUSIP in the subgroup, such that a 
portfolio with fewer positions in a

[[Page 51524]]

subgroup would have a higher measure of concentration for that 
subgroup.\19\
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    \19\ The relative weight would be calculated by dividing the 
absolute market value of a single CUSIP in the Member's portfolio by 
the total absolute market value of that portfolio.
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Market Impact Cost Calculation for the Other Asset Groups and Equities 
Subgroups
    The market impact cost for Net Unsettled Positions in the municipal 
bond, corporate bond, Illiquid Securities and UIT asset groups, and for 
Net Unsettled Positions in the treasury ETP and other ETP subgroups of 
the equities asset group would be calculated by multiplying three 
components: (1) An impact cost coefficient that is a multiple of the 
one-day market volatility of that asset group or subgroup, (2) the 
gross market value of the Net Unsettled Position in that asset group or 
subgroup, and (3) the square root of the gross market value of the Net 
Unsettled Position in that asset group or subgroup in the portfolio 
divided by an assumed percentage of the average daily trading volume of 
that subgroup.\20\
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    \20\ See supra note 13.
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Total MLA Charge Calculation for Each Portfolio
    For each asset group or subgroup, NSCC would compare the calculated 
market impact cost to a portion of the volatility charge that is 
allocated to Net Unsettled Positions in that asset group or subgroup 
(as determined by Sections I.(A)(1)(a) and I.(A)(2)(a) of Procedure XV 
of the Rules).\21\ If the ratio of the calculated market impact cost to 
the applicable 1-day volatility charge is greater than a threshold, an 
MLA charge would be applied to that asset group or subgroup.\22\ If the 
ratio of these two amounts is equal to or less than this threshold, an 
MLA charge would not be applied to that asset group or subgroup. The 
threshold would be based on an estimate of the market impact cost that 
is incorporated into the calculation of the applicable 1-day volatility 
charge, such that an MLA charge would apply only when the calculated 
market impact cost exceeds this threshold.
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    \21\ Supra note 4. NSCC's margining methodology uses a three-day 
assumed period of risk. For purposes of this calculation, NSCC would 
use a portion of the applicable volatility charge that is based on 
one-day assumed period of risk and calculated by applying a simple 
square-root of time scaling, referred to in this proposed rule 
change as ``1-day volatility charge.'' Any changes that NSCC deems 
appropriate to this assumed period of risk would be subject to 
NSCC's model risk management governance procedures set forth in the 
Model Risk Management Framework. See supra note 16.
    \22\ Initially, the threshold would be 0.4, because, currently, 
approximately 40 percent of the 1-day volatility charge addresses 
market impact costs. NSCC would review this threshold from time to 
time and any changes that NSCC deems appropriate would be subject to 
NSCC's model risk management governance procedures set forth in the 
Model Risk Management Framework. See id.
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    For each Member portfolio, NSCC would add the MLA charges for Net 
Unsettled Positions in each of the subgroups of the equities asset 
group to determine an MLA charge for the Net Unsettled Positions in the 
equities asset group. NSCC would then add the MLA charge for Net 
Unsettled Positions in the equities asset group with each of the MLA 
charges for Net Unsettled Positions in the other asset groups to 
determine a total MLA charge for a Member.
    When applicable, an MLA charge for each asset group or subgroup 
would be calculated as a proportion of the product of (1) the amount by 
which the ratio of the calculated market impact cost to the applicable 
1-day volatility charge exceeds the threshold, and (2) the 1-day 
volatility charge allocated to that asset group or subgroup.
    The ratio of the calculated market impact cost to the 1-day 
volatility charge would also determine if NSCC would apply a downward 
adjustment, based on a scaling factor, to the total MLA charge, and the 
size of any adjustment. For Net Unsettled Positions that have a higher 
ratio of calculated market impact cost to the 1-day volatility charge, 
NSCC would apply a larger adjustment to the MLA charge by assuming that 
it would liquidate that position on a different timeframe than the 
assumed margin period of risk of three business days. For example, NSCC 
may be able to mitigate potential losses associated with liquidating a 
Member's portfolio by liquidating a Net Unsettled Position with a 
larger volatility charge over a longer timeframe. Therefore, when 
applicable, NSCC would apply a multiplier to the calculated MLA charge. 
When the ratio of calculated market impact cost to the 1-day volatility 
charge is lower, the multiplier would be one, and no adjustment would 
be applied; as the ratio gets higher the multiplier decreases and the 
MLA charge is adjusted downward.
    The final MLA charge would be calculated daily and, when the charge 
is applicable, as described above, would be included as a component of 
Members' Required Fund Deposit.
Proposed Changes to NSCC Rules
    The proposal described above would be implemented into Procedure XV 
of the NSCC Rules. Specifically, the proposed changes to Procedure XV 
would describe the calculation of the MLA charge in a new subsection 
(i) of Section I(A)(1) and a new subsection (g) of Section I(A)(2).
    These new subsections would first identify each of the asset groups 
and subgroups. The proposed new subsections would then separately 
describe the two calculations of market impact cost for these asset 
groups and subgroups by identifying the components of these 
calculations. The new subsections would state that NSCC would compare 
the calculated market impact cost to a portion of that Member's 
volatility charge, to determine if an MLA charge would be applied to an 
asset group or subgroup. The new subsections would then state that NSCC 
would add each of the applicable MLA charges calculated for each asset 
group together. Finally, the new subsections would state that NSCC may 
apply a downward adjusting scaling factor to result in a final MLA 
charge.
    NSCC would also amend Section I(B)(2) of Procedure VX, which 
describes the Excess Capital Premium charge, to add the MLA charge to 
the list of Clearing Fund components that are excluded from the 
calculation of the Excess Capital Premium charge.\23\ The Excess 
Capital Premium is imposed on a Member when the Member's Required Fund 
Deposit exceeds its excess net capital. NSCC believes that including 
the MLA charge in the calculation of the Excess Capital Premium could 
lead to more frequent and unnecessary Excess Capital Premium charges. 
This is not the intended purpose of the Excess Capital Premium charge 
and could place an unnecessary burden on Members.
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    \23\ See Section I.(B)(2) of Procedure XV of the Rules. Supra 
note 4.
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(iv) Proposed Bid-Ask Spread Risk Charge
    NSCC has identified potential risk that its margining methodologies 
do not account for the transaction costs related to bid-ask spread in 
the market that could be incurred when liquidating a portfolio. Bid-ask 
spreads account for the difference between the observed market price 
that a buyer is willing to pay for a security and the observed market 
price that a seller is willing to sell that security. Therefore, NSCC 
is proposing to include a bid-ask spread risk charge in the VaR Charge 
to address this risk.
    In order to calculate this charge, NSCC would segment Member's 
portfolios into four bid-ask spread risk classes: (i) Large and medium 
capitalization equities, (ii) small capitalization equities, (iii) 
micro-capitalization equities, and (iv) ETPs.\24\
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    \24\ See supra note 16.

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[[Page 51525]]

    Each risk class would be assigned a specific bid-ask spread haircut 
rate in the form of a basis point charge that would be applied to the 
gross market value in that particular risk class. The applicable bid-
ask spread risk charge would be the product of the gross market value 
in a particular risk class in the Member's portfolio and the applicable 
basis point charge. The bid-ask spread risk charge would be calculated 
at the portfolio level, such that NSCC would aggregate the bid-ask 
spread risk charges of the applicable risk classes for the Member's 
portfolio.
    NSCC proposes to review the haircut rates annually based on either 
the analysis of liquidation transaction costs related to the bid-ask 
spread that is conducted in connection with its annual simulation of a 
Member default or market data that is sourced from a third-party data 
vendor. Based on the analyses from recent years' simulation exercises, 
NSCC does not anticipate that these haircut rates would change 
significantly year over year. NSCC may also adjust the haircut rates 
following its annual model validation review, to the extent the results 
of that review indicate the current haircut rates are not adequate to 
address the risk presented by transaction costs from a bid-ask 
spread.\25\
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    \25\ All proposed changes to the haircuts would be subject to 
NSCC's model risk management governance procedures set forth in the 
Model Risk Management Framework. See id.
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    The proposed initial haircuts are based on the analysis from the 
most recent annual default simulation and market data sourced from a 
third-party data vendor, and are listed in the table below:

------------------------------------------------------------------------
                                                                Haircut
                            Class                                (bps)
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Large and Medium Capitalization Equities....................         5.0
Small Capitalization Equities...............................        12.3
Micro-Capitalization Equities...............................        23.1
ETPs........................................................         1.5
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Proposed Changes to NSCC Rules
    The proposal described above would be implemented into Procedure XV 
of the NSCC Rules. Specifically, NSCC would amend subsection (a)(i)(I) 
of Sections I(A)(1) and I(A)(2) of Procedure XV by stating that the 
calculations of the estimations of volatility described in these 
Sections shall include an additional bid-ask spread risk charge 
measured by multiplying the gross market value of each Net Unsettled 
Position by a basis point charge. The proposed change to this 
subsection would also state that the basis point charge would be based 
on four risk classes and would identify those risk classes.
(v) Implementation Timeframe
    NSCC would implement the proposed changes no later than 10 Business 
Days after the later of the approval of the proposed rule change and no 
objection to the related advance notice \26\ by the Commission. NSCC 
would announce the effective date of the proposed changes by Important 
Notice posted to its website.
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    \26\ Supra note 3.
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2. Statutory Basis
    NSCC believes that the proposed changes are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, NSCC 
believes the proposed changes are consistent with Section 17A(b)(3)(F) 
of the Act,\27\ and Rules 17Ad-22(e)(4)(i) and (e)(6)(i), each 
promulgated under the Act,\28\ for the reasons described below.
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
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    Section 17A(b)(3)(F) of the Act requires that the rules of NSCC be 
designed to, among other things, assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible.\29\ NSCC believes the proposed change to 
implement the MLA charge is designed to assure the safeguarding of 
securities and funds which are in its custody or control or for which 
it is responsible because it is designed to address the market impact 
costs to NSCC of liquidating a Member's portfolio in the event of that 
Member's default. Specifically, the proposed MLA charge would allow 
NSCC to collect sufficient financial resources to cover its exposure 
that it may face increased market impact costs in liquidating Net 
Unsettled Positions in a particular group of securities with a similar 
risk profile or in a particular asset type that are not captured by the 
VaR Charge.
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Clearing Fund is a key tool that NSCC uses to mitigate 
potential losses to NSCC associated with liquidating a Member's 
portfolio in the event of Member default. Therefore, the proposed 
change to include the MLA charge among the Clearing Fund components, 
when applicable, would enable NSCC to better address the increased 
market impact costs of liquidating Net Unsettled Positions in a 
particular group of securities with a similar risk profile, such that, 
in the event of Member default, NSCC's operations would not be 
disrupted and non-defaulting Members would not be exposed to losses 
they cannot anticipate or control. In this way, the proposed rule 
change to implement the MLA charge is designed to assure the 
safeguarding of securities and funds which are in the custody or 
control of NSCC or for which it is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\30\
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    \30\ Id.
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    Additionally, NSCC believes that the proposed change to amend the 
VaR Charge to include bid-ask spread risk charge within Members' final 
VaR Charge would be designed to assure the safeguarding of securities 
and funds that are in the custody or control of NSCC or for which it is 
responsible because the proposed change would enable NSCC to better 
limit its exposure to increased transaction costs due to the bid-ask 
spread in the market when liquidating the a defaulted Member's 
portfolio. NSCC believes that including the above-described bid-ask 
spread risk charge within the VaR Charges would better ensure that NSCC 
calculates and collects sufficient margin and, thereby, better enable 
NSCC to limit its exposure to these transaction costs. By enabling NSCC 
to limit its exposure to Members in this way, the proposed change is 
designed to better ensure that, in the event of a Member default, NSCC 
would have adequate margin from the defaulting Member and non-
defaulting Members would not be exposed to losses they cannot 
anticipate or control. In this way, the proposed change to include the 
bid-ask spread risk charge within the calculation of the final VaR 
Charge would be designed to assure the safeguarding of securities and 
funds which are in the custody or control of NSCC or for which it is 
responsible and therefore consistent with Section 17A(b)(3)(F) of the 
Act.\31\
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Act requires, in part, that NSCC 
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, including 
by maintaining sufficient financial resources to cover its credit 
exposure to each participant fully with a high degree of 
confidence.\32\
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    \32\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above, NSCC believes that both of the proposed changes 
would enable it to better identify, measure, monitor, and, through the

[[Page 51526]]

collection of Members' Required Fund Deposits, manage its credit 
exposures to Members by maintaining sufficient resources to cover those 
credit exposures fully with a high degree of confidence.
    Specifically, NSCC believes that the proposed MLA charge would 
effectively mitigate the risks related to large Net Unsettled Positions 
of securities in the same asset group within a portfolio and would 
address the potential increased risks NSCC may face related to its 
ability to liquidate such positions in the event of a Member default.
    Therefore, NSCC believes that the proposal would enhance NSCC's 
ability to effectively identify, measure and monitor its credit 
exposures and would enhance its ability to maintain sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence. As such, NSCC believes the 
proposed changes are consistent with Rule 17Ad-22(e)(4)(i) under the 
Act.\33\
---------------------------------------------------------------------------

    \33\ Id.
---------------------------------------------------------------------------

    Additionally, NSCC believes that the proposed bid-ask spread risk 
charge would enhance NSCC's ability to identify, measure, monitor and 
manage its credit exposures to Members and those exposures arising from 
its payment, clearing, and settlement processes because the proposed 
changes would better ensure that NSCC maintains sufficient financial 
resources to cover its credit exposure to each Member with a high 
degree of confidence. NSCC believes that the proposed change would 
enable NSCC to more effectively identify, measure, monitor and manage 
its exposures to risks related to market price, and enable it to better 
limit its exposure to potential losses from Member defaults by 
providing a more effective measure of the risks related to market 
price. As described above, due to the bid-ask spread in the market, 
there is an observable transaction cost to liquidate a portfolio. The 
proposed bid-ask spread risk charge is designed to manage the risk 
related to this transaction cost in the event a Member's portfolio is 
liquidated. As such, NSCC believes that the proposed change would 
better address the potential risks that NSCC may face that are related 
to its ability liquidate a Member's Net Unsettled Positions in the 
event of that firm's default, and thereby enhance NSCC's ability to 
effectively identify, measure and monitor its credit exposures and 
would enhance its ability to maintain sufficient financial resources to 
cover its credit exposure to each participant fully with a high degree 
of confidence. In this way, NSCC believes this proposed change is also 
consistent with Rule 17Ad-22(e)(4)(i) under the Act.\34\
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    \34\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act requires, in part, that NSCC 
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, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    The Required Fund Deposits are made up of risk-based components (as 
margin) that are calculated and assessed daily to limit NSCC's credit 
exposures to Members, including the VaR Charge. NSCC's proposed change 
to introduce an MLA charge is designed to more effectively address the 
risks presented by large Net Unsettled Positions in the same asset 
group. NSCC believes the addition of the MLA charge would enable NSCC 
to assess a more appropriate level of margin that accounts for these 
risks. This proposed change is designed to assist NSCC in maintaining a 
risk-based margin system that considers, and produces margin levels 
commensurate with, the risks and particular attributes of portfolios 
that contain large Net Unsettled Positions in the same asset group and 
may be more difficult to liquidate in the event of a Member default. 
Therefore, NSCC believes the proposed change is consistent with Rule 
17Ad-22(e)(6)(i) under the Act.\36\
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    \36\ Id.
---------------------------------------------------------------------------

    Furthermore, NSCC believes that including the bid-ask spread risk 
charge within the calculation of the final VaR Charge would provide 
NSCC with a better assessment of its risks related to market price. 
This proposed change would enable NSCC to assess a more appropriate 
level of margin that accounts for this risk at the portfolio level. As 
such, each Member portfolio would be subject to a risk-based margining 
system that, at minimum, considers, and produces margin levels 
commensurate with, the risks and particular attributes of each relevant 
product, portfolio, and market, consistent with Rule 17Ad-22(e)(6)(i) 
under the Act.\37\
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    \37\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC believes that the proposed changes could have an impact on 
competition. Specifically, NSCC believes the proposed changes could 
burden competition because they would result in larger Required Fund 
Deposit amounts for Members when the additional charges are applicable 
and result in a Required Fund Deposit that is greater than the amount 
calculated pursuant to the current formula.
    When the proposal results in a larger Required Fund Deposit, the 
proposed change could burden competition for Members that have lower 
operating margins or higher costs of capital compared to other Members. 
However, the increase in Required Fund Deposit would be in direct 
relation to the specific risks presented by each Member's Net Unsettled 
Positions, and each Member's Required Fund Deposit would continue to be 
calculated with the same parameters and at the same confidence level 
for each Member. Therefore, Members that present similar Net Unsettled 
Positions, regardless of the type of Member, would have similar impacts 
on their Required Fund Deposit amounts. As such NSCC believes that any 
burden on competition imposed by the proposed changes would not be 
significant and, further, would be both necessary and appropriate in 
furtherance of NSCC's efforts to mitigate risks and meet the 
requirements of the Act, as described in this filing and further below.
    NSCC believes the above described burden on competition that may be 
created by the proposed MLA charge and the bid-ask spread risk charge 
would be necessary in furtherance of the Act, specifically Section 
17A(b)(3)(F) of the Act.\38\ As stated above, the proposed MLA charge 
is designed to address the market impact costs to NSCC of liquidating a 
Member portfolio in the event of the Member's default. Specifically, 
the proposed MLA charge would allow NSCC to collect sufficient 
financial resources to cover its exposure that it may face increased 
market impact costs in liquidating net unsettled positions that are not 
captured by the VaR Charge. Likewise, the proposed bid-ask spread risk 
charge is designed to help limit NSCC's exposures to the increased 
transaction costs due to the bid-ask spread in the market that could be 
incurred when liquidating a Member portfolio in the event of a Member 
default. Therefore, NSCC believes this proposed change is consistent 
with the requirements of Section 17A(b)(3)(F) of the Act, which 
requires that the Rules be designed to assure the safeguarding of 
securities and funds that are in

[[Page 51527]]

NSCC's custody or control or which it is responsible.\39\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78q-1(b)(3)(F).
    \39\ Id.
---------------------------------------------------------------------------

    NSCC believes these proposed changes would also support NSCC's 
compliance with Rules 17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under 
the Act, which require NSCC to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to (x) 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence; and (y) cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\40\
---------------------------------------------------------------------------

    \40\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------

    As described above, NSCC believes the introduction of the MLA 
charge would allow NSCC to employ a risk-based methodology that would 
address the increased market impact costs that NSCC could face when 
liquidating Net Unsettled Positions in in a particular group of 
securities with a similar risk profile or in a particular asset type. 
Similarly, the proposed change to include the bid-ask spread risk 
charge within the VaR Charge would allow NSCC to employ a risk-based 
methodology that would better measure the transaction costs that could 
be incurred in liquidating a defaulted Member's portfolio. Therefore, 
the proposed changes would better limit NSCC's credit exposures to 
Members, consistent with the requirements of Rules 17Ad-22(e)(4)(i) and 
Rule 17Ad-22(e)(6)(i) under the Act.\41\
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    \41\ Id.
---------------------------------------------------------------------------

    NSCC believes that the above described burden on competition that 
could be created by the proposed changes would be appropriate in 
furtherance of the Act because such changes have been appropriately 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of NSCC or for which it is responsible, as 
described in detail above. The proposed MLA charge and the proposed 
bid-ask spread risk charge would also enable NSCC to produce margin 
levels more commensurate with the risks and particular attributes of 
each Member's portfolio.
    The proposed MLA charge would do this by measuring the increased 
market impact costs that NSCC may face when liquidating a defaulted 
Member's portfolio that includes Net Unsettled Positions in a 
particular group of securities with a similar risk profile or in a 
particular asset type. With respect to the proposed bid-ask spread risk 
charge, a haircut (in the form of a basis point charge that would be 
applied to the gross market value) would be applied to separate risk 
classes in the portfolio. As described above, for purposes of 
calculating this charge, the portfolio would be segmented into four 
separate risk classes, by product type and market capitalization, and a 
haircut would be applied to the gross market value of each group. 
Therefore, because the proposed changes are designed to provide NSCC 
with an appropriate measure of the risks (i.e., risks related to both 
market impact costs and transaction costs) presented by Members' 
portfolios, NSCC believes the proposal is appropriately designed to 
meet its risk management goals and its regulatory obligations.
    NSCC believes that it has designed the proposed changes in an 
appropriate way in order to meet compliance with its obligations under 
the Act. Specifically, the proposals would improve the risk-based 
margining methodology that NSCC employs to set margin requirements and 
better limit NSCC's credit exposures to its Members. Therefore, as 
described above, NSCC believes the proposed changes are necessary and 
appropriate in furtherance of NSCC's obligations under the Act, 
specifically Section 17A(b)(3)(F) of the Act \42\ and Rules 17Ad-
22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act.\43\
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    \42\ 15 U.S.C. 78q-1(b)(3)(F).
    \43\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------

(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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

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-2020-016 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-2020-016. 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

[[Page 51528]]

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-2020-016 and should be 
submitted on or before September 10, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18198 Filed 8-19-20; 8:45 am]
BILLING CODE 8011-01-P