[Federal Register Volume 86, Number 183 (Friday, September 24, 2021)]
[Notices]
[Pages 53125-53128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-20659]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93070; File No. SR-NSCC-2021-011]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Partial Amendment No. 1 and Order 
Granting Accelerated Approval of Proposed Rule Change, as Modified by 
Partial Amendment No. 1 To Remove ID Net Transactions From the Required 
Fund Deposit Calculations and Make Other Changes to the Rules

September 20, 2021.

I. Introduction

    On July 27, 2021, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
proposed rule change SR-NSCC-2021-011. On August 6, 2021, 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 
was published for public comment in the Federal Register on August 11, 
2021,\4\ and the Commission has received comments on the changes 
proposed therein.\5\ For the reasons discussed below, the Commission is 
approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Partial Amendment No. 1 made clarification corrections to 
the description of the proposed rule change, namely the insertion of 
a legend noting the changes to the Rules have been approved but not 
yet implemented.
    \4\ Securities Exchange Act Release No. 92566 (August 5, 2021), 
86 FR 44100 (August 11, 2021) (``Notice'').
    \5\ See Letter from NSCC, dated August 6, 2021, to Vanessa 
Countryman, Secretary, Commission, available at https://www.sec.gov/comments/sr-nscc-2021-011/srnscc2021011-9122299-247146.pdf 
(providing notice of Amendment No. 1). Two other comments letters 
were received that do not raise issues related to this proposed rule 
change.
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II. Description of the Proposed Rule Change

    NSCC is proposing to revise the margin methodology set forth in its 
Rules & Procedures (``Rules'') \6\ to remove institutional delivery 
(``ID'') transactions that are processed through the ID Net Service 
from the calculation of its members' required margin. The ID Net 
Service is a joint service of NSCC and Depository Trust Company 
(``DTC'') that allows subscribers to the service,

[[Page 53126]]

which are generally executing brokers, to net, on the one side, 
affirmed eligible ID transactions that are processed through ITP 
Matching (US) LLC (``ITP'') and then held at DTC with, on the other 
side, broker-dealer transactions have been processed through NSCC's 
continuous net settlement (``CNS'') system.\7\ The ID Net Service was 
designed to provide Members with the operational benefit of efficiency 
by allowing them to net their affirmed ID transactions with their CNS 
transactions.\8\ Although ID transactions processed through the ID Net 
Service (``ID Net Transactions'') are netted with transactions that 
have been processed through NSCC's CNS system, these transactions are 
not subject to NSCC's trade guarantee, meaning in the event of a 
default, ID Net Transactions will not be completed by NSCC.\9\
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    \6\ Capitalized terms not defined herein are defined in the 
Rules, available at http://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
    \7\ DTC is a clearing agency and affiliate of NSCC that serves 
as a central securities depository providing settlement services for 
NSCC. ITP is a DTC affiliate that offers buy-side, sell-side and 
custodian firms an end-to-end straight-through-processing solution 
for trading activity, which is then settled at DTC.
    \8\ See Securities Exchange Act Release No. 57573 (March 27, 
2008), 73 FR 18019, 18019 (April 2, 2008).
    \9\ See Procedure XVI (ID Net Service), supra note 6. As 
explained in the Notice, transactions processed through the ID Net 
Service have never been subject to NSCC's trade guarantee. See 
Notice, 86 FR at 44101.
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    NSCC is also proposing to amend the Rules to provide greater 
transparency regarding the status of the ID Net Service as a non-
guaranteed service and how ID Net Transactions are handled following a 
member default. Finally, NSCC is proposing to make other changes to the 
Rules to implement these proposed changes.

A. Required Fund Deposit and Risk Management of ID Net Transactions

    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.\10\ The 
Required Fund Deposit serves as each Member's margin. The objective of 
a Member's margin 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'').\11\ 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 margin be insufficient to satisfy losses to 
NSCC caused by the liquidation of that Member's portfolio.\12\
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    \10\ See generally Rule 4 (Clearing Fund) and Procedure XV 
(Clearing Fund Formula and Other Matters). NSCC states that its 
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). See Notice, 86 FR at 
44102.
    \11\ 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), supra note 6.
    \12\ See Rule 4, section 4, supra note 6. See also Notice, 86 FR 
at 44101.
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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, and are described 
in Procedure XV of the Rules. Because ID Net Transactions are netted 
with CNS transactions, these transactions are currently included in the 
netted positions that are used to calculate certain components of 
Members' Required Fund Deposits. These components include (i) the 
volatility component, (ii) the mark-to-market component, which includes 
both (a) a Regular Mark-to-Market charge and (b) an ID Net Mark-to-
Market charge, (iii) the Margin Requirement Differential component, and 
(iv) a margin liquidity adjustment charge (``MLA charge''). Each 
component is calculated by a different methodology as identified by 
NSCC in the Rules.\13\
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    \13\ See generally Procedure XV, supra note 6.
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B. Proposed Enhancement to NSCC's Margining Methodology

    NSCC proposes to revise its margining methodology to remove ID Net 
Transactions from the calculation of Members' Required Fund Deposits. 
As noted above, NSCC does not guarantee the completion of these ID Net 
Transactions, and, in the event of a Member default, these transactions 
are excluded from NSCC's operations to be settled away from NSCC.\14\
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    \14\ See note 9 supra and accompanying text.
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    Including ID Net Transactions in the margin calculations presents 
the risk that NSCC is either under-margining or over-margining the 
positions of Members that use the ID Net Service.\15\ NSCC states that 
it could more accurately measure the risks it faces following a Member 
default by removing these non-guaranteed positions from its margining 
methodology.\16\
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    \15\ See Notice, 86 FR at 44102. For example, if the inclusion 
of ID Net Transactions in a Member's Net Unsettled Positions results 
in a lower margin charge (as compared to the margin charge that 
would have been calculated for that Member if those ID Net 
Transactions were excluded from its Net Unsettled Positions), NSCC 
could be under-margining on that Net Unsettled Position.
    \16\ See Notice, 86 FR at 44102. NSCC states it does not expect 
the proposed change to have a material impact on the size of its 
Clearing Fund. See id.
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    To implement this proposed rule change, NSCC proposes to remove ID 
Net Transactions from Members' Net Unsettled Positions for purposes of 
calculating the volatility charge and the MLA charge. NSCC also 
proposes to (1) eliminate the ID Net Mark-to-Market charge from the 
Required Fund Deposit, and (2) amend the Rules to make clear that ID 
Net Transactions are not included in the calculation of the Regular 
Mark-to-Market charge. NSCC does not propose any other changes to the 
calculation of margin charges and is not proposing any changes to the 
operation of the ID Net Service.

C. Proposed Changes To Clarify the Non-Guaranteed Status of ID Net 
Service

    NSCC also proposes to amend the Rules to provide greater 
transparency and clarity into how ID Net Transactions are processed in 
the event of a Member default. Currently, the Rules describe the 
circumstances in which NSCC may remove a Member's status as an ID Net 
Subscriber, which include the circumstances that provide NSCC with the 
right to suspend, prohibit or limit a Member's access to NSCC's 
services.\17\ Additionally, the Rules describe NSCC's ability to exit 
ID Net Transactions from its operations.\18\ NSCC has stated that 
because the ID Net Service is not a guaranteed service, NSCC would rely 
on these Rules to exit ID Net Transactions from its operations in the 
event of a Member default.\19\ Specifically, if NSCC ceased to act for 
a Member that is an ID Net Subscriber, that firm would no longer be 
eligible to use the service, NSCC would exit its ID Net Transactions 
from its operations, and those transactions would be settled on a 
trade-for-trade basis outside the ID Net Service.\20\
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    \17\ See Rule 65, Section 5, supra note 6.
    \18\ See Procedure XVI (ID Net Service), supra note 6.
    \19\ See id.
    \20\ See id.
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    NSCC proposes to amend the Rules to expressly identify ID Net as a 
non-guaranteed service and to provide further clarity on how ID Net 
Transactions will be processed in the event of a Member default.

D. Other Proposed Changes to the NSCC Rules To Implement the Proposed 
Rule Change

    NSCC proposes additional changes to the Rules in order to implement 
the

[[Page 53127]]

proposed changes described above. These changes generally are minor 
modifications relating to relevant definitions and renumbering margin 
components.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \21\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considered the proposed rule 
change, the Commission finds that the proposed changes are consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to NSCC. In particular, the Commission finds the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act,\22\ and Rules 17Ad-22(e)(4)(i) and (e)(6)(i), each promulgated 
under the Act,\23\ for the reasons described below.
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    \21\ See id. at 44103.
    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act \24\ requires that the rules of 
NSCC be designed to, among other things, to promote the prompt and 
accurate clearance and settlement of securities transactions and to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described in Section II.B above, the proposed rule change would 
revise NSCC's margining methodology to remove ID Net Transactions from 
the calculation of Members' Required Fund Deposits. The Commission 
believes that this increased change in the determination of Members' 
Required Fund Deposits should allow both NSCC and Members to more 
effectively manage and understand the risks related to ID Net 
Transactions. Therefore, the Commission believes that the proposed rule 
change is designed to promote the prompt and accurate clearance and 
settlement of ID Net Transactions and assure the safeguarding of 
securities and funds which are in the custody or control of NSCC, 
consistent with Section 17A(b)(3)(F) of the Act.\25\
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    \25\ Id.
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    In addition, as described in Sections II.C and D above, the 
proposed rule change would amend the Rules to improve the transparency 
in describing ID Net Transactions as non-guaranteed and to provide 
clarity on how these transactions will be processed in the event of a 
Member default. The proposed rule would also make technical changes to 
implement the proposed changes described above. The Commission believes 
that by clearly stating the nature of ID Net Transactions, further 
clarifying the default procedure involving ID Net Transactions, and 
making technical changes to implement the changes, the proposed rule 
change should help ensure that the Rules are accurate and clear to 
Members, thus promoting prompt and accurate clearance and settlement.

B. Consistency With Rule 17Ad-22(e)(4)(i)

    Rule 17Ad-22(e)(4)(i) under the Act \26\ 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.
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    \26\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above, NSCC proposes to remove ID Net Transactions 
from the calculation of Required Fund Deposits of Members that are ID 
Net Subscribers because ID Net Transactions are not guaranteed 
transactions and NSCC would not incur losses from ID Net Transactions. 
The proposed rule change would enable NSCC to more accurately and 
effectively measure the risks presented by Members by calculating 
margin only on the positions that NSCC may be required to complete in 
the event of a Member default. Therefore, the Commission believes the 
proposed rule change would enhance NSCC's ability to effectively 
identify, measure, monitor and, through the collection of Required Fund 
Deposits, manage its credit exposures to Members by maintaining 
sufficient financial resources to cover its credit exposure fully with 
a high degree of confidence. As such, the Commission believes the 
proposed rule change is consistent with Rule 17Ad-22(e)(4)(i) under the 
Act.\27\
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    \27\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) under the Act \28\ 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.
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    \28\ 17 CFR 24017Ad-22(e)(6)(i).
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    A Member's margin (in the form of its Required Fund Deposit) is 
made up of risk-based components that are calculated and assessed daily 
to limit NSCC's credit exposures to its members. The Commission 
believes the proposed rule change, which would remove ID Net 
Transactions from the calculation of Members' margin, should enable 
NSCC to more effectively measure the risks presented by its Members' 
guaranteed positions and, therefore, determine a more precise level of 
margin commensurate with the risks and particular attributes of 
Members' portfolios. As stated above, Required Fund Deposits are 
designed to mitigate any potential losses to NSCC associated with 
liquidating a defaulting Member's portfolio in the event NSCC ceases to 
act for that Member. ID Net Transactions are not subject to NSCC's 
trade guarantee. Consequently, in the event of a Member default related 
to ID Net Transactions, NSCC is not required to complete such 
transactions, would not have any losses, and would not need to use 
Required Fund Deposits since there is no losses. As a result, the funds 
required to cover Members' transactions would not be impacted by the ID 
Net Service. Accordingly, the Commission believes that by removing non-
guaranteed positions from the margin calculation, the proposed rule 
change would enable NSCC to collect margin more precisely tailored to 
the nature of the risk presented to NSCC.
    As a result, the Commission believes the proposed rule change would 
enhance NSCC's ability 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. Therefore, the Commission believes the proposed change is 
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\29\
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    \29\ Id.

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[[Page 53128]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Partial Amendment No. 1, is consistent with the 
Exchange 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-2021-011 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-NSCC-2021-011. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such 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-2021-011 and should be submitted on 
or before October 15, 2021.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Partial Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\30\ to approve the proposed rule change prior to the 
30th day after the date of publication of Partial Amendment No.1 in the 
Federal Register. As discussed above, in Partial Amendment No. 1, NSCC 
updates its proposed rule text to include a legend to indicate a 
delayed implementation date, specifically that the rule change would be 
implemented no later than 10 Business Days after Commission approval of 
the proposed rule change. Partial Amendment No. 1 improves the 
efficiency of the filing process by obviating the need for NSCC to 
propose another change to its rules to resolve the omitted legend in 
the future, while not changing the purpose of or basis for the Proposed 
Rule Change.
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    \30\ 15 U.S.C. 78s(b)(2).
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    For similar reasons as discussed above, the Commission finds that 
Partial Amendment No. 1 is consistent with the requirement that NSCC's 
rules be designed, in part, to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible under Section 17A(b)(3)(F) of the Exchange 
Act.\31\ Accordingly, the Commission finds good cause for approving the 
Proposed Rule Change, as modified by Partial Amendment No. 1, on an 
accelerated basis, pursuant to Section 19(b)(2) of the Exchange 
Act.\32\
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    \31\ 15 U.S.C. 78q-1(b)(3)(F).
    \32\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular with the requirements of Section 17A of the Act and 
the rules and regulations promulgated thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\33\ that the proposed rule change SR-NSCC-2021-011 be, and hereby is, 
approved.\34\
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    \33\ Id.
    \34\ In approving the proposed rule change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \35\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-20659 Filed 9-23-21; 8:45 am]
BILLING CODE 8011-01-P