[Federal Register Volume 86, Number 92 (Friday, May 14, 2021)]
[Notices]
[Pages 26588-26594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10175]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91809; File No. SR-NSCC-2021-005]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Increase the 
National Securities Clearing Corporation's Minimum Required Fund 
Deposit

May 10, 2021.
    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 April 26, 2021, National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to NSCC's Rules 
& Procedures (``Rules'') \3\ in order to increase the minimum Required 
Fund Deposit for each Member.
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, available at https://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 increase the minimum Required Fund Deposit, as 
described in greater detail below.

[[Page 26589]]

The Minimum Required Fund Deposit
    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.\4\ The Required Fund Deposit serves as each 
Member's margin. The objective of a Member's Required Fund Deposit is 
to mitigate potential losses to NSCC associated with liquidation of the 
Member's portfolio in the event NSCC ceases to act for that Member 
(hereinafter referred to as a ``default'').\5\ The aggregate of all 
Members' Required Fund Deposits, together with certain other deposits 
required under the Rules, constitutes the Clearing Fund of NSCC, which 
it would access, among other instances, 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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    \4\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters) (``Procedure XV''), supra note 3. 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).
    \5\ 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 3.
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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.\6\ Currently, each Member is required to maintain 
a minimum Required Fund Deposit amount of $10,000.\7\ If a Member's 
Required Fund Deposit, as calculated by Procedure XV, is less than 
$10,000 on a given day, NSCC requires a deposit to bring the Member's 
Required Fund Deposit up to $10,000. The first 40% of a Member's 
Required Fund Deposit, but no less than the minimum Required Fund 
Deposit amount of $10,000, is required to be in cash.\8\
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    \6\ Procedure XV, supra note 3.
    \7\ Section 1 of Rule 4, supra note 3.
    \8\ Section II.(A) of Procedure XV, supra note 3.
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    NSCC's margining methodologies are designed to mitigate market, 
liquidity and other risks. NSCC regularly assesses its margining 
methodologies to evaluate whether margin levels are commensurate with 
the particular risk attributes of each relevant product, portfolio, and 
market. In connection with such regular reviews, NSCC has determined 
that there are circumstances where the current minimum Required Fund 
Deposit amount is insufficient to manage NSCC's risk in the event of an 
abrupt or sudden increase in a Member's activity.
    NSCC employs daily backtesting to determine the adequacy of each 
Member's Required Fund Deposit.\9\ NSCC compares the Required Fund 
Deposit \10\ for each Member with the simulated liquidation gains/
losses using the actual positions in the Member's portfolio, and the 
actual historical security returns. A backtesting deficiency occurs 
when NSCC determines that a Member's Required Fund Deposit would not 
have been adequate to address the projected liquidation losses 
estimated from a Member's settlement activity based on the backtesting 
results. NSCC investigates the cause(s) of any backtesting 
deficiencies. As a part of this investigation, NSCC pays particular 
attention to Members with backtesting deficiencies that bring the 
results for that Member below the 99% confidence target (i.e., greater 
than two backtesting deficiency days in a rolling twelve-month period) 
to determine if there is an identifiable cause of repeat backtesting 
deficiencies.\11\ NSCC also evaluates whether multiple Members may 
experience backtesting deficiencies for the same underlying reason. 
Backtesting deficiencies highlight exposure that could subject NSCC to 
potential losses under normal market conditions in the event that a 
Member defaults.
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    \9\ See Model Risk Management Framework (``Model Risk Management 
Framework''), Securities Exchange Act Release No. 81485 (August 25, 
2017), 82 FR 41433 (August 31, 2017) (NSCC-2017-008) (sets forth the 
model risk management practices of NSCC and states that Value at 
Risk (``VaR'') and Clearing Fund requirement coverage backtesting 
would be performed on a daily basis or more frequently) and 
Securities Exchange Act Release No. 84458 (October 19, 2018), 83 FR 
53925 (October 25, 2018) (File No. SR-NSCC-2018-009) (amends the 
Model Risk Management Framework).
    \10\ Members may be required to post additional collateral to 
the Clearing Fund in addition to their Required Fund Deposit amount. 
See e.g, Rule 15 (Assurance of Financial Responsibility and 
Operational Capability), supra note 3 (providing that adequate 
assurances of financial responsibility of a Member may be required, 
such as increased Clearing Fund deposits). For backtesting 
comparisons, NSCC uses the Required Fund Deposit amount, without 
regard to the actual, total collateral posted by the Member to the 
Clearing Fund.
    \11\ The 99% confidence target is consistent with Rule 17Ad-
22(e)(6)(iii) which requires NSCC to calculate margin to cover its 
``potential future exposure'' which is defined in Rule 17Ad-
22(a)(13) to mean the ``maximum exposure estimated to occur at a 
future point in time with an established single-tailed confidence 
level of at least 99 percent with respect to the estimated 
distribution of future exposure.'' 17 CFR 240.17Ad-22(a)(13), 
(e)(6)(iii).
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    While multiple factors may contribute to a Member's backtesting 
deficiency, a position increase by a Member after the calculation of 
such Member's Required Fund Deposit may be a factor that leads to the 
Member incurring backtesting deficiencies due to the additional 
exposure that is not mitigated until the collection of the Required 
Fund Deposit occurs intraday, or on the next business day. This factor 
is heightened for those Members that maintain a low or minimum Required 
Fund Deposit because there are less deposits to mitigate the additional 
exposure caused by a position increase.
    Typical examples where Members may be maintaining a minimum 
Required Fund Deposit amount of $10,000 include (1) when a new Member 
has activated its clearing accounts at NSCC and is growing its 
business; (2) when a Member generally has limited or infrequent 
transaction activity; and (3) when a Member is winding down its 
business and is in the process of retiring its NSCC membership. In each 
of these circumstances, an abrupt increase in clearing activity 
following a period of low or no clearing activity could cause NSCC to 
be under-margined with respect to the Member and may result in 
backtesting deficiencies. Therefore, NSCC is proposing to increase the 
minimum Required Fund Deposit amount of $10,000 to address the risk 
that NSCC becomes under-margined in circumstances when a Member is 
subject to the current minimum Required Fund Deposit amount. As 
discussed below, NSCC has observed that Members that maintain a 
Required Fund Deposit of less than $250,000 disproportionately account 
for the number of Members with a confidence target below 99% due to 
repeat backtesting deficiencies.
    In determining the appropriate minimum Required Fund Deposit 
amount, NSCC reviewed varying minimum Required Fund Deposit amounts to 
determine the anticipated effects of increasing the minimum Required 
Fund Deposits on Clearing Fund coverage and on backtesting results. 
NSCC also conducted a review of minimum deposit requirements of 
registered clearing agencies and foreign central counterparty clearing 
houses (``CCPs'') to compare NSCC's minimum Required Fund Deposit with 
the deposits required by registered clearing agencies and foreign CCPs. 
As discussed below, based on the results of the reviews and the 
comparison of other registered clearing agencies and foreign

[[Page 26590]]

CCPs, NSCC believes that a proposed minimum Required Fund Deposit 
amount of $250,000 would provide an appropriate balance of improving 
Member backtesting results and NSCC's Clearing Fund coverage, while 
minimizing the impact to Members.
    NSCC conducted a review of backtesting deficiencies during the 
period from June 3, 2019 to May 29, 2020 (``Impact Study Period'') to 
determine the anticipated backtesting coverage using $250,000 as the 
minimum Required Fund Deposit amount and amounts lower and higher than 
$250,000. The results of the reviews indicated that using $250,000 as 
its minimum Required Fund Deposit amount would improve NSCC's rolling 
twelve-month Clearing Fund coverage and reduce the number of Members 
with backtesting coverage below 99%.\12\ Based on a review of 
backtesting deficiencies during the Impact Study Period, approximately 
22% of backtesting deficiencies occurred with Members that maintained a 
Required Fund Deposit of less than $250,000. In addition, those Members 
that maintained a Required Fund Deposit of less than $250,000 had a 
disproportionate amount of repeat backtesting deficiencies and were 
more likely to have backtesting coverage below the 99% confidence 
target. During the Impact Study Period, 29 Members fell below the 99% 
confidence target. Deficiencies that occurred for Members with a 
Required Fund Deposit lower than $250,000 accounted for 22% of the 
total backtesting deficiencies, while Members that maintained a 
Required Fund Deposit lower than $250,000 constituted approximately 45% 
of the Members that fell below the 99% confidence target. If the 
proposed changes had been in place, those Members would constitute only 
27% of Members that fell below the 99% confidence target which is 
comparable to those Members' overall representation as a class. 
Approximately 88% of the deficiencies that occurred on the days when 
Members maintained a Required Fund Deposit of less than $250,000 would 
have been eliminated during that period if the Required Fund Deposit 
were $250,000 or higher. During the Impact Study Period, NSCC observed 
a total of 227 backtesting deficiencies. If a minimum requirement of 
$250,000 had been assessed, 44 deficiencies would have been eliminated 
across 13 Members. Overall a $250,000 minimum requirement would have 
increased NSCC's twelve-month coverage by 0.14% to 99.41%, eliminated 
44 deficiencies, improved rolling twelve-month coverage for 7 Members 
to above 99% compared to 5 Members if a $100,000 minimum Required Fund 
Deposit had been applied, and improved the rolling twelve-month 
coverage for 6 additional Members. The review of backtesting 
deficiencies during the Impact Study Period also indicated that raising 
the minimum Required Fund Deposit to $250,000 would decrease 
backtesting deficiencies to a greater extent than raising it to a lower 
amount such as $100,000 and would increase the Clearing Fund coverage 
to a greater extent.\13\
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    \12\ Backtesting percentages indicate the risk that a minimum 
Required Fund Deposit will be insufficient to manage risk in the 
event of a Member's default. A backtesting coverage that is below 
the 99% confidence target for a Member means that the Member has 
more than two backtesting deficiency days in a rolling twelve-month 
period. As indicated above, consistent with Rule 17Ad-22(e)(6)(iii), 
NSCC pays particular attention to Members with backtesting 
deficiencies that bring the results for that Member below the 99% 
confidence target to determine if there is an identifiable cause of 
repeat backtesting deficiencies. See supra note 9.
    \13\ Over the Impact Study Period, if the minimum Required Fund 
Deposit had been set to $250,000 compared to $100,000, there would 
have been 10 more backtesting deficiencies eliminated; overall 
increasing the 12-month backtesting coverage percentage by 0.03% to 
99.41%.
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    NSCC's review of the requirements of other clearing agencies and 
foreign CCPs indicated that NSCC's minimum Required Fund Deposit 
requirement of $10,000 was significantly lower than minimum deposits or 
equivalent required by such other entities.\14\ While the minimum 
required fund deposits of such other entities is not dispositive as to 
the risk borne by NSCC or the proper fund deposit amounts to offset 
such risk, it is indicative of the amounts that users of other 
similarly situated entities can expect to pay as a minimum required 
fund deposit to use the services of the clearing agencies and foreign 
CCPs and the impact to such users. The comparison shows that entities 
using other clearing agencies and foreign CCPs pay significantly more 
in minimum fund deposits to use similar services than the minimum 
Required Fund Deposit amount at NSCC.
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    \14\ For example, the minimum initial contribution for The 
Options Clearing Corporation (``OCC'') is $500,000. See Rule 1002(d) 
of the OCC Rules, available at https://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_rules.pdf. The minimum Required Fund 
Deposit for both the Government Securities Division (``GSD'') and 
Mortgage-Backed Securities Division (``MBSD'') of Fixed Income 
Clearing Corporation (``FICC'') is $100,000. See Rule 4 of FICC GSD 
Rulebook, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf and Rule 4 of the FICC MBSD Clearing 
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_mbsd_rules.pdf.
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    Based on the backtesting results discussed above and the impact to 
Members of raising the minimum Required Fund Deposit amount to 
$250,000, NSCC believes that raising it to $250,000 is the appropriate 
minimum Required Fund Deposit amount that will minimize the financial 
impact to its Members while maximizing risk management of activity that 
is guaranteed at the point of validation or comparison by NSCC.
    As is currently provided for in the Rules, NSCC is proposing to 
continue to require that Members deposit an amount equal to the minimum 
Required Fund Deposit in cash.\15\ NSCC permits Members to satisfy 
their Required Fund Deposit obligations through a combination of cash 
and open account indebtedness secured by Eligible Clearing Fund 
Securities.\16\ Cash deposits are fungible. NSCC would be therefore be 
further strengthening its liquidity resources by requiring each Member 
to deposit a baseline of $250,000 in cash to the Clearing Fund.
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    \15\ Section II.(A) of Procedure XV, supra note 3.
    \16\ Rule 4, Section 1, supra note 3.
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Proposed Rule Changes
    In order to implement the proposed increase in the minimum Required 
Fund Deposit amount to $250,000, Section 1 of Rule 4 would be revised 
to state that the minimum Required Fund Deposit for each Member shall 
be $250,000. In addition, Section II.(A) of Procedure XV would be 
revised to replace the minimum contribution amount from $10,000 to 
$250,000. Section II.(A) of Procedure XV currently provides that no 
less than $10,000, the minimum Required Fund Deposit, of a Member's 
Required Fund Deposit must be in cash.\17\ To reflect the increase in 
the minimum Required Fund Deposit, NSCC would also increase the minimum 
cash requirement to $250,000 to match the proposed increased minimum 
Required Fund Deposit amount.
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    \17\ Section II.(A) of Procedure XV, supra note 3.
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Implementation Timeframe
    NSCC would implement the proposed changes no later than 20 Business 
Days after the approval of the proposed rule change by the Commission. 
NSCC would announce the effective date of the proposed changes by 
Important Notice posted to its website.
2. Statutory Basis
    NSCC believes that the proposed changes described above are 
consistent with the requirements of the Act and the

[[Page 26591]]

rules and regulations thereunder applicable to a registered clearing 
agency. In particular, NSCC believes that the proposed changes are 
consistent with Section 17A(b)(3)(F) of the Act,\18\ and Rules 17Ad-
22(e)(4)(i) and (e)(6)(iii), each promulgated under the Act,\19\ for 
the reasons described below.
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(iii).
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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.\20\ NSCC believes the proposed changes are 
designed to assure the safeguarding of securities and funds which are 
in its custody or control or for which it is responsible because they 
are designed to enable NSCC to require the necessary margin for Members 
who maintain a minimum Required Fund Deposit to limit its exposure to 
such Members in the event of a Member default. Having adequate margin 
for such Members would help ensure that NSCC does not need to use its 
own resources, or the Eligible Clearing Fund Securities and funds of 
non-defaulting Members, to cover losses in the event of a default of 
such Members. Specifically, the proposed rule change seeks to remedy 
potential situations that are described above where NSCC could be 
under-margined. By ensuring that Members that maintain the minimum 
Required Fund Deposit amount are adequately covering NSCC's risk of 
loss, NSCC would be reducing the risk of losses, which would need to be 
addressed by using non-defaulting Members' securities or funds, or NSCC 
funds. In addition, by requiring that Members pay an amount equal to 
the minimum Required Fund Deposit amount in cash, NSCC would be making 
available additional collateral that is easier to access upon a 
Member's default, further reducing the risk of losses and using non-
defaulting Members' securities or funds, or NSCC funds. Therefore, NSCC 
believes the proposed rule change enhances the safeguarding of 
securities and funds that are in the custody or control of NSCC, 
consistent with Section 17(b)(3)(F) of the Act.\21\
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
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    Rule 17Ad-22(e)(4)(i) under the Act requires that NSCC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to Members and those arising from its 
payment, clearing, and settlement processes, including by maintaining 
sufficient financial resources to cover its credit exposure to each 
Member fully with a high degree of confidence.\22\
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    \22\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above, NSCC believes that the proposed changes would 
enable it to better identify, measure, monitor, and, through the 
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. More 
specifically, as a review of backtesting deficiencies during the Impact 
Study Period has indicated, raising the minimum Required Fund Deposit 
amount to $250,000 would decrease the number of backtesting 
deficiencies and help ensure that NSCC maintains the coverage of credit 
exposures for more Members at a confidence level of at least 99%. In 
addition, by requiring that Members pay an amount equal to the minimum 
Required Fund Deposit amount in cash, NSCC would be making available 
collateral that is easier to access when Members default further 
reducing the risk of losses, which would require using non-defaulting 
Members' securities or funds, or NSCC funds. Therefore, NSCC believes 
that the proposed changes would enhance NSCC's ability to effectively 
identify, measure, monitor and manage its credit exposures and would 
enhance its ability to maintain sufficient financial resources to cover 
its credit exposure to each Member 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.\23\
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    \23\ Id.
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    Rule 17Ad-22(e)(6)(iii) under the Act requires that NSCC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to cover its credit exposures to its Members by 
establishing a risk-based margin system that, at a minimum, calculates 
margin sufficient to cover its potential future exposure to Members in 
the interval between the last margin collection and the close out of 
positions following a Member default.\24\ NSCC employs daily 
backtesting to determine the adequacy of each Member's Required Fund 
Deposit paying particular attention to Members that have backtesting 
deficiencies below the 99% confidence target. Such backtesting 
deficiencies highlight exposure that could subject NSCC to potential 
losses if a Member defaults. As discussed above, NSCC has determined 
that approximately 22% of all backtesting deficiencies occur for those 
Members that maintain a Required Fund Deposit of less than $250,000 and 
that approximately 88% of the deficiencies of those Members would have 
been eliminated during the Impact Study Period if the Required Fund 
Deposit were $250,000 or higher. By raising the minimum Required Fund 
Deposit amount to $250,000, NSCC believes it can decrease the 
backtesting deficiencies by Members, and thus decrease exposure to such 
Members in the event of a default. NSCC believes that the increase in 
margin for those Members that currently maintain a Required Fund 
Deposit of less than $250,000 would improve the probabilities that the 
margin maintained by such Members is sufficient to cover its potential 
future exposure to Members in the interval between the last margin 
collection and the close out of positions following a Member default. 
Therefore, NSCC believes the proposed change is consistent with Rule 
17Ad-22(e)(6)(iii) under the Act.\25\
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    \24\ 17 CFR 240.17Ad-22(e)(6)(iii).
    \25\ 17 CFR 240.17Ad-22(e)(6)(iii).
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC believes that the proposed changes to increase the minimum 
Required Fund Deposit could have an impact on competition. 
Specifically, NSCC believes that the proposed changes could burden 
competition because they would result in larger Required Fund Deposits 
for Members in cash that currently have Required Fund Deposits of less 
than $250,000. The proposed changes could impose more of a burden on 
those Members that have lower operating margins, lower cash reserves or 
higher costs of capital compared to other Members. NSCC believes that 
any burden on competition imposed by the proposed changes would not be 
significant and 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 that any burden on competition presented by the 
proposed changes to increase the minimum Required Fund Deposit amount 
would not be significant. As discussed above, NSCC believes that the 
increase to $250,000 is consistent with what users of other similarly 
situated registered clearing agencies and foreign CCPs are expected to 
pay as a required deposit for similar services. In addition, by 
limiting

[[Page 26592]]

the proposed Required Fund Deposit to $250,000 rather than a higher 
minimum Required Fund Deposit, NSCC would be minimizing the financial 
impact to its Members while maximizing risk management of activity that 
is guaranteed at the point of validation or comparison by NSCC.
    While an increase to $100,000 rather than $250,000 would also 
reduce backtesting deficiencies, it would not reduce it to the same 
extent as if the minimum Required Fund Deposit were raised to $250,000. 
If the minimum Required Fund Deposit were raised to $250,000 rather 
than $100,000, NSCC would have observed 10 more backtesting 
deficiencies eliminated. If the minimum Required Fund Deposit was 
increased to $100,000, the 12-month rolling backtesting coverage 
percentage across NSCC would improve from 99.27% to 99.38%; an increase 
to $250,000 would improve the coverage to 99.41%. Backtesting 
deficiencies highlight exposure that could subject NSCC to potential 
losses under normal market conditions in the event that a Member 
defaults. NSCC believes that the additional reduction in exposure that 
would occur if the minimum Required Fund Deposit were raised to 
$250,000 rather than $100,000 justifies added expense to the Members 
who currently have a minimum Required Fund Deposit of less than 
$250,000.
    Even if the burden were deemed significant with respect to certain 
Members, NSCC believes that the above described burden on competition 
that may be created by the proposed changes would be necessary in 
furtherance of the Act, specifically Section 17A(b)(3)(F) of the 
Act,\26\ because, as described above, the Rules must be designed to 
assure the safeguarding of securities and funds that are in NSCC's 
custody or control or which it is responsible.
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    \26\ 15 U.S.C. 78q-1(b)(3)(F).
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    More specifically, NSCC believes these proposed changes are 
necessary to support NSCC's compliance with Rules 17Ad-22(e)(4)(i) and 
17Ad-22(e)(6)(iii) under the Act,\27\ 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 Members and those arising from its 
payment, clearing, and settlement processes, including by maintaining 
sufficient financial resources to cover its credit exposure to each 
Member fully with a high degree of confidence; and (y) cover its credit 
exposures to its Members by establishing a risk-based margin system 
that, at a minimum, calculates margin sufficient to cover its potential 
future exposure to Members in the interval between the last margin 
collection and the close out of positions following a Member default.
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    \27\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(iii).
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    As described above, NSCC believes increasing the minimum Required 
Fund Deposit amount to $250,000 would decrease the number of 
backtesting deficiencies and ensure that NSCC maintains the coverage of 
credit exposures for more Members at a confidence level of at least 
99%. This outcome is consistent with Rule 17Ad-22(e)(6)(iii) which 
requires that NSCC calculate sufficient margin to cover its ``potential 
future exposure'' which is defined as the ``maximum exposure estimated 
to occur at a future point in time with an established single-tailed 
confidence level of at least 99 percent with respect to the estimated 
distribution of future exposure.'' \28\ NSCC also believes that the 
increase in margin for those Members that currently maintain a Required 
Fund Deposit of less than $250,000 would help ensure that the margin 
deposited by such Members is sufficient to cover NSCC's potential 
future exposure in the interval between the last margin collection and 
the close out of positions following a Member default. Therefore, NSCC 
believes that these 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)(iii) under the Act.\29\
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    \28\ 17 CFR 240.17Ad-22(e)(6)(iii). See also 17 CFR 240.17Ad-
22(a)(13) (definition of ``potential future exposure'').
    \29\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(iii).
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    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 proposal would enable NSCC to produce 
margin levels more commensurate with the risks it faces as a central 
counterparty. The increase in minimum Required Fund Deposit would be in 
relation to the credit exposure risks presented by the class of Members 
that currently maintain a Required Fund Deposit of less than $250,000, 
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 risk, regardless of the 
type of Member, would have similar impacts on their Required Fund 
Deposit amounts. In addition, based on the comparison of other 
registered clearing agencies and foreign CCPs, NSCC believes that the 
increase to $250,000 is consistent with what users of other similarly 
situated registered clearing agencies and foreign CCPs are expected to 
pay and would not be a significant burden on Members. In many cases, 
other registered clearing agencies and foreign CCPs require greater 
minimum fund deposit amounts. In addition, based on the results of the 
review of backtesting deficiencies during the Impact Study Period as 
discussed above, NSCC believes that a proposed minimum Required Fund 
Deposit of $250,000 would provide an appropriate balance of improving 
Member backtesting results and NSCC's Clearing Fund coverage, while 
minimizing the impact to Members by not raising the minimum Required 
Fund Deposit above $250,000. Therefore, because the proposed changes 
are designed to provide NSCC with a more appropriate and complete 
method of managing the risks presented by each Member and to minimize 
the impact to Members, 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 a way 
that is both necessary and appropriate to meet compliance with its 
obligations under the Act. Specifically, the proposal to increase the 
minimum Required Fund Deposit amount to $250,000 would better limit 
NSCC's credit exposures to its Members. In addition, by continuing to 
require that Members pay an amount equal to the minimum Required Fund 
Deposit amount in cash, NSCC would be making available additional 
collateral that is easier for NSCC to access upon a Member's default, 
further limiting its credit exposure to 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 \30\ and Rules 17Ad-
22(e)(4)(i) and 17Ad-22(e)(6)(iii) under the Act.\31\ For these 
reasons, the proposed changes are not designed to be an artificial 
barrier to entry but a necessary and appropriate changes to address 
specific risk.
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    \30\ 15 U.S.C. 78q-1(b)(3)(F).
    \31\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(iii).

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[[Page 26593]]

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

    NSCC conducted Member outreach with each Member that had an average 
Required Fund Deposit of less than $500,000 for the twelve-month period 
ending May 2019 to provide notice and an opportunity to discuss the 
proposed changes. One Member stated that it had an objection to the 
proposal to raise the minimum Required Fund Deposit from $10,000 to 
$250,000 and stated that (i) the proposed changes would solely burden 
the least active and lowest risk firms, (ii) the proposed changes do 
not have correlation with risk or any appropriate cost allocation at 
NSCC, (iii) the proposed changes are purely a tax on small firms and 
NSCC is intent on creating artificial barriers to entry through 
unjustified capital requirements and (iv) the current policies, 
procedures and standards are more than adequate to guard against risk 
at the small firm-level.\32\
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    \32\ The letter sent by the Member also contained comments 
relating to another proposal that are not addressed herein.
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    First, the proposed changes would not solely burden the least 
active and lowest risk firms. Members that maintain a minimum Required 
Fund Deposit of less than $250,000 do include smaller firms and firms 
that conduct infrequent activity, but they also consist of newer firms 
that are ramping up activity and firms that are winding down, 
regardless of size.
    Second, the proposed changes are designed to address risk. 
Backtesting results indicate that deficiencies that occurred for 
Members with a Required Fund Deposit lower than $250,000 accounted for 
22% of the total backtesting deficiencies, while Members that 
maintained a Required Fund Deposit lower than $250,000 constituted 
approximately 45% of the Members that fell below the 99% confidence 
target during the Impact Study Period. If the proposed changes had been 
in place, those Members would constitute only 27% of Members that fell 
below the 99% confidence target which is comparable to those Members' 
overall representation as a class. Backtesting deficiencies indicate a 
risk that Required Fund Deposit will be insufficient to manage risk in 
the event of such Member's default. For the reasons outlined above, 
NSCC determined that raising the minimum Required Fund Deposit to 
$250,000 was the appropriate amount to both mitigate the risk in the 
event of default and minimize the burden on members by not raising the 
minimum Required Fund Deposit to a higher amount.
    Third, the proposed increase to the Required Fund Deposit is not 
purely a tax on small firms and is not intended as an artificial 
barrier to entry. While the proposed changes would be an added expense 
on certain smaller firms that currently have a Required Fund Deposit of 
less than $250,000, it would apply to all firms regardless of size and 
so would not be disproportionally applied. Backtesting deficiencies 
indicate that firms with a minimum Required Fund Deposit expose NSCC 
and other Members to risk in the event of such Member's default. 
Raising the Required Fund Deposit to $250,000 would mitigate the risks 
presented by those Members who have a required Fund Deposit of less 
than $250,000 as outlined above. In addition, as indicated above, 
although the proposed changes may be more of a burden on those Members 
that have lower operating margins, lower cash reserves or higher costs 
of capital compared to other Members, NSCC believes that the increase 
in Required Fund Deposit is necessary and appropriate as it would apply 
in relation to the credit exposure risks presented by the class of 
Members that currently maintain a Required Fund Deposit of less than 
$250,000. As observed in the Impact Study Period, 46 Members would be 
impacted by the proposed $250,000 minimum Required Fund Deposit. On 
average, 18 Members maintained excess deposit greater than the proposed 
increase. Therefore, 28 Members on average would have been required to 
deposit additional funds if the proposal had been implemented. In 
addition, the 46 Members that would be impacted by the proposed 
$250,000 minimum Required Fund Deposit, maintained excess net capital 
\33\ or equity capital \34\ (as applicable) (''ENC'') in excess of $800 
thousand on average over the Impact Study Period, ranging between an 
average $834 thousand to $211.5 billion, with 98% of the impacted 
Members having on average an ENC above $2.5 million, which can be used 
to estimate impacted Members' ability to satisfy additional Required 
Fund Deposit amounts required by the proposal.
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    \33\ For this purpose, excess net capital is the amount, as of a 
particular date, equal to the difference between the net capital of 
a broker or dealer and the minimum net capital such broker or dealer 
must have to comply with the requirements of Rule 15c3-1(a) of the 
Act (17 CFR 240.15c3-1(a)), or any successor rule or regulation 
thereto.
    \34\ For this purpose, equity capital is defined as the amount 
defined on the Consolidated Report of Condition and Income (i.e., a 
``Call Report'' that is required to be filed by banks and trust 
companies).
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    Fourth, as indicated by the backtesting results, NSCC believes that 
the current minimum Required Fund Deposit does indicate risk with 
respect to those Members that maintain a minimum Required Fund Deposit 
of less than $250,000 and the increase in the minimum Required Fund 
Deposit would reduce that risk. NSCC believes that increasing the 
minimum Required Fund Deposit to $250,000 would provide an appropriate 
balance of improving Member backtesting results and NSCC's Clearing 
Fund coverage which will reduce risk for all Members, while minimizing 
the impact to Members by not raising the minimum Required Fund Deposit 
to a higher amount which would create more of a burden.
    Finally, the Member stated that while it objected to raising the 
minimum Required Fund Deposit to $250,000, it would not object to an 
increase to $100,000. NSCC observed that the increase would have 
improved the Clearing Fund 12-month backtesting coverage percentage to 
99.41% overall, and eliminated 10 additional backtesting deficiencies 
during the Impact Study Period provided by a minimum $250,000 Required 
Fund Deposit as compared to a minimum $100,000 Required Clearing Fund 
Deposit. NSCC's findings validate raising the minimum to $250,000. 
While an increase to a minimum Required Fund Deposit to $100,000 would 
also represent an improvement of the Clearing Fund coverage, the number 
of deficiencies eliminated would be fewer. If the minimum Required Fund 
Deposit had been $250,000 during the Impact Study Period, NSCC would 
have observed an increase in the number of eliminated deficiencies 
compared to if the minimum Required Fund Deposit had been $100,000. 
Backtesting deficiencies indicate a risk that the minimum Required Fund 
Deposit would be insufficient in the event of a Member's default. NSCC 
believes the elimination of such additional backtesting deficiencies, 
together with the improvement of the overall Clearing Fund coverage 
percentage to 99.41%, if the minimum Required Fund Deposit were raised 
to $250,000 rather than $100,000, reflect a reduction in risk that 
justifies raising the minimum Required Fund Deposit to $250,000 rather 
than $100,000. As a result, NSCC believes that $250,000 is the 
appropriate minimum Required Fund Deposit amount that will minimize the 
financial impact to its Members while maximizing risk management of 
activity

[[Page 26594]]

that is guaranteed at the point of validation or comparison by NSCC.
    NSCC completed an additional round of outreach to all NSCC Members 
in April 2021 and did not receive any written comments. NSCC will 
notify the Commission of any additional 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-2021-005 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-2021-005. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of NSCC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NSCC-2021-005 and should be submitted on 
or before June 4, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10175 Filed 5-13-21; 8:45 am]
BILLING CODE 8011-01-P