[Federal Register Volume 86, Number 88 (Monday, May 10, 2021)]
[Notices]
[Pages 24989-24994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09788]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91770; File No. SR-NSCC-2021-801]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of No Objection To Advance Notice To Amend the 
Supplemental Liquidity Deposit Requirements

May 4, 2021.

I. Introduction

    On March 5, 2021, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-NSCC-2021-801 (``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 amend its Supplemental Liquidity Deposit 
Requirements.\4\ The Advance Notice was published for comment in the 
Federal Register on March 24, 2021,\5\ and the Commission has received 
comments in support of the changes proposed in the Advance Notice.\6\ 
The Commission is hereby providing 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\ See Notice of Filing infra note 5, at 86 FR 15750.
    \5\ Exchange Act Release No. 91347 (March 18, 2021), 86 FR 15750 
(March 24, 2021) (File No. SR-NSCC-2021-801) (``Notice of Filing''). 
NSCC also filed a related proposed rule change with the Commission 
pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b-4 
thereunder. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. 
NSCC seeks approval of the proposed changes to its rules necessary 
to implement the Advance Notice (the ``Proposed Rule Change''). The 
Proposed Rule Change was published in the Federal Register on March 
24, 2021. Securities Exchange Act Release No. 91350 (March 18, 
2021), 86 FR 15738 (March 24, 2021) (SR-NSCC-2021-002). The comment 
period for the related Proposed Rule Change closed on April 14, 
2021.
    \6\ Comments are available at https://www.sec.gov/comments/sr-nscc-2021-801/srnscc2021801.htm. Since the proposal contained in the 
Advance Notice was also filed as a separate but related Proposed 
Rule Change, all public comments received on the proposals are 
considered regardless of whether the comments are submitted to the 
Proposed Rule Change or the Advance Notice. To date, the comments 
received generally support the proposal.

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[[Page 24990]]

II. The Advance Notice

A. Background

    As a central counterparty (``CCP''),\7\ 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 the 
contract, thereby reducing the risk faced by its Members \8\ 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 a 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). To do so, and to meet its related regulatory 
requirements, NSCC seeks to maintain sufficient liquid resources in 
order to meet the potential funding required to settle outstanding 
transactions of a defaulting Member in a timely manner, as well as to 
hold qualifying liquid resources sufficient to meet its minimum 
liquidity resource requirement in each relevant currency for which it 
has payment obligations owed to its Members.\9\
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    \7\ 17 CFR 240.17Ad-22(a)(1).
    \8\ Capitalized terms not defined herein are defined in NSCC's 
Rules and Procedures (``Rules''), available at http://dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
    \9\ 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) (approving NSCC's Liquidity Risk 
Management Framework).
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    NSCC has a number of default liquidity resources that it considers 
to be qualifying liquid resources for the purposes of Rule 17Ad-
22(a)(14).\10\ These resources include: (1) Cash deposits to the NSCC 
Clearing Fund; \11\ (2) the proceeds of the issuance and private 
placement of (a) short-term, unsecured notes in the form of commercial 
paper and extendable notes (``Commercial Paper Program''),\12\ and (b) 
term debt (``Term Debt Issuance''); \13\ (3) cash that would be 
obtained by drawing on NSCC's committed 364-day credit facility with a 
consortium of banks (``Line of Credit''); \14\ and (4) supplemental 
liquidity deposits, collected pursuant to NSCC Rule 4(A), as discussed 
further below.\15\
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    \10\ See Notice of Filing, supra note 5, at 15751. Qualifying 
liquid resources include, among other things: Cash held either at 
the central bank of issue or at creditworthy commercial banks, and 
assets that are readily available and convertible into cash through 
prearranged funding arrangements, such as committed arrangements 
without material adverse change provisions, including lines of 
credit, foreign exchange swaps, and repurchase agreements. 17 CFR 
240.17Ad-22(a)(14).
    \11\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters) of the Rules, supra note 8.
    \12\ 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).
    \13\ See Securities Exchange Act Release No. 88146 (February 7, 
2020), 85 FR 8046 (February 12, 2020) (File No. SR-NSCC-2019-802).
    \14\ 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).
    \15\ See Rule 4(A) (Supplemental Liquidity Deposits) of the 
Rules, supra note 8. See also Securities Exchange Act Release Nos. 
70999 (December 5, 2013), 78 FR 75413 (December 11, 2013) (File No. 
SR-NSCC-2013-02); 71000 (December 5, 2013), 78 FR 75400 (December 
11, 2013) (File No. SR-NSCC-2013-802).
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B. Current Rules Relating to Supplemental Liquidity Deposits

    Currently, NSCC only collects supplemental liquidity deposits 
during monthly options expiry periods in order to cover the heightened 
liquidity exposure resulting from increased trading activity around 
options expiration.\16\ NSCC only collects supplemental liquidity 
deposits from its 30 largest Members or group of affiliated Members 
(hereinafter, ``Providers'').\17\ NSCC calculates each Provider's 
supplemental liquidity obligation for an upcoming options expiry period 
using an estimate based on NSCC's highest liquidity need and the 
Provider's settlement activity during the prior 24-months.\18\ 
Providers, in turn, must fund their supplemental liquidity obligations 
two business days prior to the start of the options expiry period, 
which NSCC will return seven business days after the end of that 
period.\19\
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    \16\ See Rule 4(A), supra note 8. NSCC defines the duration of 
the options expiry periods in its Rules, which typically runs from 
the third Friday of the month to the following Tuesday. See id.
    \17\ See Section 2 of Rule 4(A), supra note 8. NSCC may use a 
Provider's supplemental liquidity deposit to satisfy a loss or 
liability arising only from that Provider's default on its 
obligations to NSCC. Supplemental liquidity deposits are not 
otherwise subject to NSCC's Loss Allocation Waterfall. See Section 
13(c) of Rule 4(A), supra note 8.
    \18\ See Section 2 of Rule 4(A), supra note 8. Typically, NSCC 
performs this calculation, at the latest, one week prior to the 
start of the options expiry period.
    \19\ See Sections 4 and 9 of Rule 4(A), supra note 8.
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    In order to ensure NSCC maintains adequate liquidity resources 
throughout the options expiry period, providers may voluntarily prefund 
additional supplemental liquidity deposits at the start of the period, 
if it anticipates increases in its trading activity, compared to its 
historical activity, will create a liquidity shortfall at NSCC.\20\ In 
the event a Provider fails to provide adequate voluntary prefunded 
deposits, NSCC may require the Provider to fund additional supplemental 
liquidity deposits if NSCC experiences a resulting liquidity 
shortfall,\21\ which NSCC may hold for up to 90 days.\22\ The 90-day 
lock-up incentivizes Providers to voluntarily prefund their 
supplemental liquidity deposits in order to ensure NSCC maintains 
adequate liquidity resources throughout the options expiry period.
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    \20\ See Section 2 of Rule 4(A), supra note 8. See also, Notice 
of Filing, supra note 5, at 15752.
    \21\ See Section 7 of Rule 4(A), supra note 8.
    \22\ See Section 10 of Rule 4(A), supra note 8.
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C. Proposed Changes to the Rules Relating to Supplemental Liquidity 
Deposits

    As discussed above, NSCC may only collect supplemental liquidity 
deposits during monthly options expiry periods under its current Rules. 
However, NSCC can face sudden liquidity shortfalls on any business day, 
not just those business days that fall within monthly options expiry 
periods, particularly during volatile market conditions unrelated to 
options expiration.\23\ To address this issue, NSCC proposes to change 
the frequency at which it may collect supplemental liquidity deposits 
to each business day, based on a daily calculation. This proposed 
approach to collecting supplemental liquidity deposits should allow 
NSCC to respond quickly to any sudden liquidity shortfalls arising from 
a Provider's activity, regardless of when those shortfalls occur.
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    \23\ See Notice of Filing, supra note 5, at 15752.
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    NSCC also proposes an alternative pro rata daily calculation in the 
rare event its regular daily calculation would inadvertently result in 
collecting supplement liquidity deposits from multiple Providers that, 
taken together, would significantly exceed NSCC's liquidity needs on 
that day. Additionally, NSCC proposes the ability to collect 
supplemental liquidity deposits on an intraday basis in certain 
instances where sudden intraday increases in liquidity risk justify 
shortening the amount of time NSCC is exposed to that risk, including a 
mandatory intraday collection in connection with monthly options expiry 
periods.

[[Page 24991]]

1. Proposed Daily Calculation of Supplemental Liquidity Deposits
    A Provider \24\ will be obligated to provide a supplemental 
liquidity deposit on each business day in which its settlement activity 
causes a liquidity shortfall at NSCC.\25\ NSCC will provide a notice to 
each Provider of the amount of its supplemental liquidity deposit, 
which the Provider will be required to fund within one hour of such 
notice.\26\ NSCC proposes to return supplemental liquidity deposits on 
the next business day.\27\
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    \24\ Under the proposal, Providers will continue to be the 30 
largest Members or group of affiliated Members, but NSCC proposes to 
simplify how it determines the 30 Providers in order to provide 
greater transparency and predictability in its determination. The 30 
Providers will be determined daily and will be based on the 
Provider's settlement activity during the prior 24-months. NSCC's 
determination will no longer require a calculation of liquidity 
exposures the Providers presented to NSCC based on NSCC's qualifying 
liquid resources throughout a 24 month lookback period. NSCC will 
continue to make available to each Member daily information on 
NSCC's liquidity need based on that Member's settlement activity on 
the previous business day.
    \25\ A liquidity shortfall will arise if NSCC's daily liquidity 
need exceeds its qualifying liquid resources, assuming stressed 
market conditions. NSCC will continue to apply stress scenarios in 
determining its total qualifying liquid resources in order to 
anticipate market conditions that could cause those resources to be 
unavailable on that day. Because the daily calculation will be done 
at the start of each business day, it will be based on the 
qualifying liquid resources available to NSCC as of the end of the 
prior business day.
    \26\ NSCC's proposed timing would mirror the current requirement 
that is applied to its Members' Required Fund Deposits (i.e., 
margin), which is also calculated and collected daily, and must be 
funded within one hour of demand. NSCC expects to deliver 
notification of Provider obligations by around 8:30 a.m. ET each 
business day, with deposits required by no later than 9:30 a.m. ET. 
See Notice of Filing, supra note 5, at 15753.
    \27\ See Notice of Filing, supra note 5, at 15754. Because NSCC 
would recalculate supplemental liquidity deposits daily, NSCC will 
no longer need to hold deposits for the extended periods under its 
current Rules. See id.
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    NSCC states that, under its proposed calculation, it will no longer 
need to estimate its liquidity need for a Provider's expected 
settlement activity based on the Provider's historical settlement 
activity.\28\ Instead, each Provider's deposit will be calculated based 
on NSCC's actual liquidity need based on the Provider's daily 
settlement activity in the event the Provider defaulted on that day, 
which NSCC believes will provide both NSCC and Providers with a more 
reliable measure of the liquidity risks posed to NSCC.\29\
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    \28\ See Notice of Filing, supra note 5, at 15753.
    \29\ See id.
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    NSCC provided the Commission with the results of an impact study 
comparing the proposal against the observed regulatory liquidity needs 
and NSCC's qualifying liquid resources available during the period from 
2016 through 2020. The study assessed both pro-forma and hypothetical 
impacts of the proposal under various liquidity scenarios. The study 
also analyzed historical trends including the average composition and 
rankings of the top 30 Providers at NSCC during the 2016 to 2020 
period. Based on the pro-forma/hypothetical impact as well analysis of 
the top Providers, the study's results generally indicate that the 
proposal would continue to allow NSCC to meet its regulatory liquidity 
obligations, and the largest Members would continue to be the ones 
affected by supplemental liquidity obligations.\30\
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    \30\ See id. NSCC further states that if its other qualifying 
liquid resources materially decrease, it would expect to see an 
increase in both number and amount of supplemental liquidity 
obligations that Providers would have been required to fund under 
the proposed rule. See id. at 15756.
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2. Proposed Pro Rata Calculation of Supplemental Liquidity Deposits
    As a potential alternative to the calculation described above, NSCC 
proposes a discretionary pro rata calculation that could apply in the 
event two or more Providers each would be obligated to provide a 
supplemental liquidity deposit of more than $2 billion on a business 
day pursuant to the calculation described above.\31\ Under the proposed 
alternative, NSCC will have the option to allocate, on a pro rata 
basis, its largest liquidity need on a business day to all Providers 
that are required to make a supplemental liquidity deposit on that day, 
thereby reducing all such Providers' obligations to NSCC on that day. 
NSCC's determination will be based on the market conditions at that 
time. For example, NSCC may determine that, in certain market 
conditions, this alternative approach would be appropriate to alleviate 
liquidity pressures on all Providers required to make a supplemental 
liquidity deposit on that day.\32\ NSCC states this alternative would 
allow NSCC to use this pro rata calculation to sufficiently cover its 
liquidity exposure on that day, without requiring that all Providers 
fund the total amount of its calculated supplemental liquidity deposit 
on that day.
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    \31\ NSCC represents that it has never had two or more Providers 
owe more than $2 billion on a calculation date since its adoption of 
the supplemental liquidity deposit Rules in 2013. Therefore, NSCC 
believes this alternative calculation would only be available in 
very limited circumstances. See Notice of Filing, supra note 5, at 
15754.
    \32\ See Notice of Filing, supra note 5, at 15754.
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3. Proposed Intraday Supplemental Liquidity Calls
    NSCC also proposes to establish intraday supplemental liquidity 
calls, which are intended to allow NSCC to calculate and collect 
additional supplemental liquidity deposits on an intraday basis if a 
Provider's increased daily activity levels or projected settlement 
activity causes a NSCC liquidity shortfall during a given day.\33\ NSCC 
believes the proposed intraday supplemental liquidity calls will help 
to mitigate increased liquidity exposures presented to NSCC on an 
intraday basis in specified circumstances, as discussed further 
below.\34\
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    \33\ The alternative pro rata calculation described in Section 
II.C.2 would not apply to an intraday supplemental liquidity call.
    \34\ See Notice of Filing, supra note 5, at 15754.
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i. Proposed Mandatory Intraday Supplemental Liquidity Call
    First, NSCC proposes to establish a mandatory monthly intraday 
supplemental liquidity call that is calculated and collected, when 
applicable, on the first business day (typically a Friday) of an 
options expiry period.\35\ A Provider's mandatory intraday supplemental 
liquidity call will be the difference between, on the one hand, NSCC's 
qualifying liquid resources and, on the other hand, NSCC's daily 
liquidity need based on the Provider's settlement activity at the start 
of the business day, recalculated to account for both the Provider's 
actual settlement activity submitted to NSCC over the course of the 
day, and the Provider's projected settlement activity in stock options 
expected to be submitted to NSCC.\36\ Because NSCC's recalculated daily 
liquidity need will not factor in late day trades or other off-setting 
settlement activity,\37\ NSCC proposes to adjust its re-calculated 
daily liquidity need using an estimated

[[Page 24992]]

netting percentage based on each Provider's average percentage of 
netting from its off-setting settlement activity observed over the 
prior 24 months. NSCC states that the actual settlement activity 
flowing into NSCC for cash settlement of stocks underlying expiring 
options is typically lower than the projected settlement activity NSCC 
receives from OCC on the Thursday before the start of the options 
expiry period due to late day offsetting trades in stock options on 
that Friday; therefore, applying this netting percentage should more 
accurately reflect the actual liquidity exposures that will be 
presented to NSCC from the Providers.\38\
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    \35\ NSCC will retain how it defines the duration of the options 
expiry periods in its Rules. See supra note 19.
    \36\ Each business day, NSCC receives information regarding 
projected settlement activity from The Options Clearing Corporation 
(``OCC'') pursuant to a Stock and Futures Settlement Agreement. That 
agreement provides for the clearance and settlement of exercises and 
assignments of options on eligible securities or the maturity of 
eligible stock futures contracts through NSCC. See Securities 
Exchange Act Release No. 81260 (July 31, 2017), 82 FR 36484 (August 
4, 2017) (File Nos. SR-NSCC-2017-803; SR-OCC-2017-804). In this 
case, the re-calculation will be based on the data NSCC receives 
from OCC late Thursday.
    \37\ See Notice of Filing, supra note 5, at 15754. For example, 
an affiliated Member may be entitled, under NSCC Rules, to liquidity 
credits based the trading activity of its affiliates, who are also 
Members, in order to determine NSCC's net liquidity exposure from 
the affiliated family of Members.
    \38\ See Notice of Filing, supra note 5, at 15754.
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ii. Proposed Discretionary Intraday Supplemental Liquidity Call
    Second, NSCC proposes to establish a discretionary intraday 
supplemental liquidity call on any business day other than the first 
business day during options expiry periods. Under this provision, NSCC 
will have the discretion to call for additional supplemental liquidity 
deposits on an intraday basis on any such business day if a Provider's 
increased activity levels during that day would cause a liquidity 
shortfall at NSCC. The amount of a Provider's intraday supplemental 
liquidity call, pursuant to NSCC's discretion, would be the difference 
between NSCC's daily liquidity need, recalculated to take into account 
the increase in the Provider's settlement activity during the day, and 
NSCC's qualifying liquid resources.
    NSCC states that it would collect a discretionary intraday call in 
circumstances where NSCC believes it should accelerate the collection 
of a Provider's supplemental liquidity obligation because that 
Provider's intraday settlement activity would cause NSCC's liquidity 
needs to exceed its liquidity resources.\39\ For example, NSCC may 
impose an intraday supplemental liquidity call on a Provider if NSCC 
determines that Provider is unlikely to meet its projected settlement 
obligations through the settlement cycle due to rapidly escalating 
financial stress.\40\ NSCC will make this determination based on a 
variety of factors, including NSCC's assessment of the Provider's 
ability to meet its obligations to NSCC (i.e., an assessment of the 
Provider's creditworthiness on a particular business day) or estimates 
of settlement activity that could offset settlement exposures and are 
not reflected in NSCC's liquidity estimates.\41\
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    \39\ See id.
    \40\ See id.
    \41\ See id.
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III. 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.\42\
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    \42\ 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.\43\ 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): \44\
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    \43\ 12 U.S.C. 5464(a)(2).
    \44\ 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 other areas.\45\
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    \45\ 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'').\46\ 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.\47\ 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 finds the proposal in the Advance 
Notice is consistent with the objectives and principles described in 
Section 805(b) of the Clearing Supervision Act,\48\ and in the Clearing 
Agency Rules, in particular Rule 17Ad-22(e)(7)(i) and (ii).\49\
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    \46\ 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 Adopting Release''). NSCC is a ``covered clearing agency'' as 
defined in Rule 17Ad-22(a)(5).
    \47\ Id.
    \48\ 12 U.S.C. 5464(b).
    \49\ 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission finds that the Advance Notice is consistent with the 
stated objectives and principles of Section 805(b) of the Clearing 
Supervision Act.\50\ Specifically, the Commission finds that the 
changes proposed in the Advance Notice are consistent with promoting 
robust risk management in the area of liquidity risk, promoting safety 
and soundness, reducing systemic risks, and supporting the broader 
financial system.
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    \50\ 12 U.S.C. 5464(b).
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    The Commission finds that the changes proposed in the Advance 
Notice are consistent with promoting robust risk management, in 
particular the management of liquidity risk presented to NSCC. As a CCP 
and a SIFMU, it is imperative that NSCC maintains adequate resources to 
satisfy liquidity needs arising from its settlement obligations, 
including in the event of a Member default. As described above in 
Section II.C.1, NSCC currently may only collect supplemental liquidity 
deposits during monthly options expiry periods. However, NSCC can also 
face increased liquidity exposure from a Member's activity outside of 
these periods, even if unrelated to options settlement activity. The 
ability to calculate and collect supplemental liquidity deposits, as 
applicable, on a daily basis should help NSCC more accurately manage 
its daily liquidity exposures based on Members' actual activity, as 
opposed to only being able to collect additional liquidity resources 
from Members during monthly options expiry. Moreover, the proposal 
would allow NSCC to determine the amount of supplemental liquidity 
deposits based on Members' actual activity, providing more precise and, 
potentially, lower charges for Members than provided under the current 
methodology, which uses estimates based on a look-back period and can, 
on occasion, result in NSCC collecting more resources than needed to 
cover its exposure.

[[Page 24993]]

    Additionally, as described above in Section II.C.3, NSCC also 
proposes to include both mandatory and discretionary intraday 
supplemental liquidity calls which would allow NSCC to calculate and 
collect additional supplemental liquidity deposits on an intraday basis 
if a Provider's increased activity levels during that day or projected 
settlement activity causes NSCC's daily liquidity need to exceed its 
qualifying liquid resources. The Commission finds that the mandatory 
monthly intraday supplemental liquidity calls on the first business day 
of the monthly options expiry periods should help NSCC continue to 
manage the potential increased liquidity exposures that may arise from 
options settlement-related activity by allowing it to accelerate the 
collection of supplemental liquidity deposits on that day, as opposed 
to waiting for the proposed daily collection that would occur on the 
morning of the following business day. Moreover, the proposed 
discretionary intraday supplemental liquidity calls should collect 
additional supplemental liquidity deposits from Members whose activity 
outside of the monthly options expiry periods may cause a sudden 
increase in NSCC's liquidity needs on an overnight basis. Therefore, 
because NSCC's proposal is designed to enable NSCC to better limit its 
liquidity exposures that could arise in the event of a Member default, 
the Commission finds the changes proposed in the Advance Notice promote 
robust risk management, specifically in the area of liquidity risk.
    The Commission also finds that the changes proposed in the Advance 
Notice are consistent with promoting safety and soundness, reducing 
systemic risks, and promoting the stability of the broader financial 
system. As described above, NSCC's proposal to calculate and collect, 
if applicable, supplemental liquidity deposits on a daily basis could 
provide NSCC with additional liquidity resources, including on days 
outside of monthly Options Expiration Activity Periods, in the event of 
a Member default. Therefore, the changes proposed would promote safety 
and soundness by enabling NSCC to obtain additional liquid resources to 
cover a liquidity gap that could arise in the event of a Member 
default.\51\ By covering such a gap, the proposal bolsters NSCC's 
ability to meet its settlement obligations in the event of a Member 
default and its ability to continue to provide CCP services to its 
Members.
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    \51\ The Commission has reviewed and considered the results of 
NSCC's hypothetical impact studies. See supra note 30 and 
accompanying text. Based on that review, the Commission concludes 
that the proposal could help mitigate the risks to NSCC that could 
arise if NSCC is unable to secure adequate default liquidity from 
other sources in an amount necessary to meet its liquidity needs. 
For example, the proposal could help mitigate the risks that could 
arise if investor demand for the short-term notes issued under the 
Commercial Paper Program weakens, there is limited investor demand 
for term debt issued pursuant to a Term Debt Issuance, or NSCC is 
unable to renew its Line of Credit at the targeted amount.
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    In addition, the proposed changes should reduce the potential 
procyclicality of NSCC's liquidity demands, which could reduce the 
potential for unexpected liquidity stress to market participants in 
certain situations. Because NSCC would now calculate and collect, if 
applicable, supplemental liquidity deposits on a daily basis, the 
proposal should reduce the likelihood that NSCC would have to call on 
its Members to contribute additional liquidity in periods of financial 
stress, when liquidity may be most costly. Therefore, the Commission 
finds that 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.
    Maintaining adequate liquidity resources to help meet settlement 
obligations in the event of a Member default also enhances NSCC's 
ability to manage systemic risk and to support the broader financial 
system. NSCC's ability to obtain additional liquid resources for use in 
the event of a Member default should reduce 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 would reduce the potential 
transmission of financial shocks from defaulting Members to non-
defaulting Members, thereby enhancing the ability of NSCC and its 
Members to continue to provide stability and safety to the financial 
markets that they serve.
    Additionally, establishing an optional alternative pro rata 
calculation of supplemental liquidity deposits could help NSCC 
alleviate any unintended but significant liquidity constraints on its 
Members, while still enabling NSCC to meet its regulatory requirements 
with respect to liquidity without collecting more liquidity resources 
than needed. The proposed pro rata calculation would provide NSCC with 
a method to reduce the supplemental liquidity deposits owed by all 
Providers who would otherwise be obligated to provide such a deposit, 
which would be appropriate in light of the likely stressed market 
conditions that would result in two or more Providers presenting a 
potential supplemental liquidity deposit of over $2 billion. Likewise, 
because NSCC would recalculate supplemental liquidity deposit 
obligations each business day, NSCC will no longer need to hold 
supplemental liquidity deposits for the extended periods under its 
current Rule 4(A), which could also alleviate liquidity pressures on 
its Members. Accordingly, the Commission finds the proposal is 
consistent with reducing systemic risks, and promoting the stability of 
the broader financial system as contemplated in Section 805(b) of the 
Clearing Supervision Act.\52\
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    \52\ 12 U.S.C. 5464(b).
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    For the reasons stated above, the Commission finds the changes 
proposed in the Advance Notice are consistent with Section 805(b) of 
the Clearing Supervision Act.\53\
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    \53\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(7)(i) and (ii)

    The Commission finds the changes proposed in the Advance Notice are 
consistent with Rules 17Ad-22(e)(7)(i) and (ii), each promulgated under 
the Exchange Act,\54\ for the reasons described below.
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    \54\ 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
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    Rule 17Ad-22(e)(7)(i) under the Exchange Act requires that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain 
sufficient liquid resources at the minimum in all relevant currencies 
to effect same-day and, where appropriate, intraday and multiday 
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 obligation for the covered 
clearing agency in extreme but plausible market conditions.\55\ Rule 
17Ad-22(e)(7)(ii) under the Act requires that a cover clearing agency 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to hold qualifying liquid resources 
sufficient to meet the minimum liquidity resource requirement under 
Rule 17Ad-22(e)(7)(i) in each relevant currency for which the covered 
clearing agency has

[[Page 24994]]

payment obligations owed to its clearing members.\56\
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    \55\ 17 CFR 240.17Ad-22(e)(7)(i).
    \56\ 17 CFR 240.17Ad-22(e)(7)(ii). For purposes of Rule 17Ad-
22(e)(7)(ii), ``qualifying liquid resources'' are defined in Rule 
17Ad-22(a)(14) as including, in part, cash held either at the 
central bank of issue or at creditworthy commercial banks. 17 CFR 
240.17Ad-22(a)(14).
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    As described above, the changed proposed in the Advance Notice 
would help strengthen NSCC's ability to maintain sufficient liquid 
resources to complete end-of-day settlement in the event of the Member 
default by allowing NSCC to calculate and collect, when applicable, 
supplemental liquidity deposits every business day, or on an intraday 
basis, from those Members that pose the largest liquidity exposures to 
NSCC on that day. These resources would be available to NSCC to 
complete end-of-day settlement in the event of the default of a Member. 
Moreover, the Commission has reviewed and considered the impact study 
results provided by NSCC comparing the proposal against the observed 
regulatory liquidity needs and NSCC's qualifying liquid resources 
available during the period from 2016 through 2020, to assess both pro-
forma and hypothetical impacts of the proposal under various liquidity 
scenarios,\57\ and finds that these results generally indicated that 
the proposal would continue allow NSCC to meet its regulatory liquidity 
obligations.
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    \57\ See supra note 30 and accompanying text.
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    In addition, deposits made to satisfy supplemental liquidity 
deposit obligations are currently and will continue to be required to 
be made as cash deposits, which will continue to be held by NSCC at 
either its cash deposit account at the Federal Reserve Bank of New 
York, at a creditworthy commercial bank, or in other investments 
pursuant to NSCC's Clearing Agency Investment Policy.\58\ Therefore, 
supplemental liquidity deposits would continue to be considered a 
qualifying liquid resource, as defined by Rule 17Ad-22(a)(14),\59\ and 
would support NSCC's ability to hold qualifying liquid resources 
sufficient to meet the minimum liquidity resource requirement under 
Rule 17Ad-22(e)(7)(i),\60\ as required by Rule 17Ad-22(e)(7)(ii).\61\
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    \58\ 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).
    \59\ 17 CFR 240.17Ad-22(a)(14).
    \60\ 17 CFR 240.17Ad-22(e)(7)(i).
    \61\ 17 CFR 240.17Ad-22(e)(7)(ii).
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    Accordingly, the Commission finds that implementation of the 
proposed amendments to supplemental liquidity deposits would be 
consistent with Rule 17Ad-22(e)(7)(i) and (ii) under the Exchange 
Act.\62\
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    \62\ 17 CFR 240.17Ad-22(e)(7).
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IV. 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-2021-801) and that NSCC is authorized to 
implement the proposed change as of the date of this notice or the date 
of an order by the Commission approving proposed rule change SR-NSCC-
2021-002, whichever is later.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-09788 Filed 5-7-21; 8:45 am]
BILLING CODE 8011-01-P