[Federal Register Volume 86, Number 231 (Monday, December 6, 2021)]
[Notices]
[Pages 69109-69111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-26336]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93678; File No. SR-NSCC-2021-014]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed
Rule Change To Enhance the Transparency of the Calculation of the
Backtesting Charge
November 30, 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 November 23, 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.
NSCC filed the proposed rule change pursuant to Section 19(b)(3)(A) of
the Act \3\ and Rule 19b-4(f)(4) thereunder.\4\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(4).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change of NSCC consists of modifications to
Procedure XV (Clearing Fund Formula and Other Matters) of the NSCC
Rules & Procedures (``Rules'') to provide additional transparency into
the calculation of the Backtesting Charge that may be collected by NSCC
as part of Members' Required Fund Deposits to the Clearing Fund by
clarifying that such calculation does not include amounts already
collected from a Member as a Backtesting Charge, as described in
greater detail below.\5\
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\5\ Terms not defined herein are defined in the Rules, available
at http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
(a) Purpose
NSCC is proposing amendments to the Rules that would provide
additional transparency into the calculation of the Backtesting Charge
by clarifying that such calculation does not include amounts already
collected from a Member as a Backtesting Charge. NSCC is not proposing
to change how it calculates Members' backtesting coverage or any
applicable Backtesting Charge and is proposing only to include
additional transparency in the Rules in describing those calculations,
as described in greater detail below.
Overview of NSCC's Clearing Fund and the Backtesting Charge
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.\6\ 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 liquidating a
Member's portfolio in the event NSCC ceases to act for that Member
(hereinafter referred to as a ``default'').\7\ The aggregate of all
Members' Required Fund Deposits constitutes the Clearing Fund of NSCC.
NSCC would access its Clearing Fund should a defaulting Member's own
Required Fund Deposit be insufficient to satisfy losses to NSCC caused
by the liquidation of that Member's portfolio. Pursuant to the Rules,
each Member's Required Fund Deposit consists of a number of applicable
components, each of which is calculated to address specific risks faced
by NSCC, as identified within Procedure XV of the Rules.\8\
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\6\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters), id. 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).
\7\ 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 a Member
defaults on a financial or other obligation to NSCC. See Rule 46
(Restrictions on Access to Services) of the Rules, supra note 6.
\8\ Supra note 6.
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NSCC employs daily backtesting to determine the adequacy of each
Member's Required Fund Deposit. NSCC compares the Required Fund Deposit
\9\ for each Member with the simulated liquidation gains/losses using
the actual positions in the Member's portfolio, and the actual
historical security returns. 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 percent 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. NSCC also evaluates whether multiple
Members may experience backtesting
[[Page 69110]]
deficiencies for the same underlying reason.
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\9\ For backtesting comparisons, NSCC uses the Required Fund
Deposit amount without regard to the actual collateral posted by the
Member.
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The Backtesting Charge, as described in Section I(B)(3) of
Procedure XV, may be an additional component of a Member's Required
Fund Deposit that NSCC may assess at either the start of the day
(referred to in the Rules as the ``Regular Backtesting Charge'') or on
an intraday basis (the ``Intraday Backtesting Charge).\10\ More
specifically, NSCC may assess a Backtesting Charge against any Member
that has a 12-month trailing backtesting coverage below the 99 percent
backtesting coverage target. If assessed, a Member's Backtesting Charge
is generally equal to the Member's third largest deficiency, when
calculating the Regular Backtesting Charge, and fifth largest
deficiency, when calculating the Intraday Backtesting Charge, that
occurred during the previous 12 months.\11\ As described in Procedure
XV, NSCC may adjust the Backtesting Charge if it determines that
circumstances particular to a Member's settlement activity and/or
market price volatility warrant a different approach to determining or
applying such charge in a manner consistent with achieving NSCC's
backtesting coverage target.\12\
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\10\ Section I(B)(3) of Procedure XV (Clearing Fund Formula and
Other Matters) of the Rules, supra note 6. See also Release No.
79167 (October 26, 2016), 81 FR 75883 (November 1, 2016) (File Nos.
SR-FICC-2016-006; SR-NSCC-2016-004).
\11\ Id.
\12\ Id.
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NSCC calculates the Backtesting Charge monthly and, based on those
calculations, may either impose a new Backtesting Charge or remove an
existing Backtesting Charge, or it may either increase or decrease a
Member's existing Backtesting Charge as necessary to maintain its
target backtesting coverage. When calculating a Member's backtesting
coverage for purposes of the Backtesting Charge and when calculating
any applicable Backtesting Charge, NSCC does not include amounts
already collected from that Member as a Backtesting Charge. As
described above, the objective of the Backtesting Charge is to increase
Required Fund Deposits for Members that are likely to experience
backtesting deficiencies by an amount sufficient to maintain such
Member's backtesting coverage above the 99 percent confidence
threshold. By excluding the Backtesting Charge in these calculations,
NSCC is able to more accurately evaluate Members' historical
backtesting deficiencies and coverage ratios to determine if any
adjustment to a Member's Backtesting Charge is appropriate.
Proposed Revisions To Clarify the Calculation of the Backtesting Charge
NSCC is proposing to revise Section I(B)(3) of Procedure XV to
provide additional transparency into the calculation of the Backtesting
Charge.\13\ As described above, Procedure XV states that the
Backtesting Charge may apply to Members that have 12-month trailing
backtesting coverage below the 99 percent backtesting coverage target
and that the Regular Backtesting Charge is calculated as the Member's
third largest deficiency that occurred during the previous 12 months,
and the Intraday Backtesting Charge is calculated as the Member's fifth
largest deficiency in that same time period. Currently, however,
Procedure XV does not state that NSCC does not include amounts already
collected as a Backtesting Charge from a Member in calculating either
that Member's backtesting coverage or calculating any applicable
Backtesting Charge.
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\13\ Id.
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Therefore, in order to add additional transparency to the Rules
regarding the calculation of the Backtesting Charge, NSCC is proposing
to amend Section I(B)(3) of Procedure XV to state that, for purposes of
calculating a Member's backtesting coverage and any applicable
Backtesting Charge, NSCC would not include amounts already collected as
a Backtesting Charge from that Member.
2. Statutory Basis
NSCC believes that the proposed changes are consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. In particular, NSCC
believes the proposed changes are consistent with Section 17A(b)(3)(F)
of the Act,\14\ and Rule 17Ad-22(e)(23)(ii) promulgated under the Act,
\15\ for the reasons described below.
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
\15\ 17 CFR 240.17Ad-22(e)(23)(ii).
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Section 17A(b)(3)(F) of the Act requires that the rules of NSCC be
designed to, among other things, promote the prompt and accurate
clearance and settlement of securities transactions.\16\ NSCC believes
the proposed changes are consistent with the requirements of Section
17A(b)(3)(F) of the Act because such changes would clarify and improve
the transparency of the Rules regarding the calculation of the
Backtesting Charge.
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\16\ 15 U.S.C. 78q-1(b)(3)(F).
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More specifically, the proposed changes would amend Section I(B)(3)
of Procedure XV to provide Members with additional information
regarding the calculation of the Backtesting Charge by stating that,
for purposes of calculating a Member's backtesting coverage and any
applicable Backtesting Charge, NSCC would not include amounts already
collected as a Backtesting Charge from that Member. By enhancing the
clarity and transparency of the Rules, the proposed changes would allow
Members to more efficiently and effectively conduct their business in
accordance with the Rules, which NSCC believes would promote the prompt
and accurate clearance and settlement of securities transactions. As
such, NSCC believes that the proposed changes would be consistent with
Section 17A(b)(3)(F) of the Act.\17\
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\17\ Id.
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Rule 17Ad-22(e)(23)(ii) under the Act requires, in part, that NSCC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in the covered clearing
agency.\18\ By providing Members with additional information regarding
the calculation of the Backtesting Charge and clarifying that it would
not include amounts already collected as a Backtesting Charge from that
Member in such calculations, the proposed changes improve the
transparency of the Rules. By providing Members with additional
information that would enable them to evaluate the risks and material
costs they incur by participating in NSCC, NSCC believes the proposed
changes are consistent with the requirements of Rule 17Ad-
22(e)(23)(ii).\19\
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\18\ 17 CFR 240.17Ad-22(e)(23)(ii).
\19\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
NSCC does not believe the proposed rule changes would impact
competition. The proposed rule changes would merely enhance the clarity
and transparency of the Rules and is not proposing any changes to the
calculation of Members' Required Fund Deposits. Therefore, the proposed
changes would not affect NSCC's operations or the rights and
obligations of membership. As such, NSCC believes the proposed rule
changes would not have any impact on competition.
[[Page 69111]]
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
NSCC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they will be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
Commission's Division of Trading and Markets at
[email protected] or 202-551-5777.
NSCC reserves the right not to respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) \20\ of the Act and paragraph (f) \21\ of Rule 19b-4
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NSCC-2021-014 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-2021-014. 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-2021-014 and should be submitted on
or before December 27, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-26336 Filed 12-3-21; 8:45 am]
BILLING CODE 8011-01-P