[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