[Federal Register Volume 87, Number 138 (Wednesday, July 20, 2022)]
[Notices]
[Pages 43355-43364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-15451]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95286; File No. SR-NSCC-2022-009]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Adopt Intraday
Volatility Charge and Eliminate Intraday Backtesting Charge
July 14, 2022.
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 July 7, 2022, 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 of NSCC consists of modifications to
Procedure XV (Clearing Fund Formula and Other Matters) of the NSCC's
Rules & Procedures (``Rules'') to (1) adopt an intraday volatility
charge that may be collected by NSCC on an intraday basis as part of
Members' Required Fund Deposits to the Clearing Fund; and (2) eliminate
the Intraday Backtesting Charge, as described in greater detail
below.\3\
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\3\ 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
NSCC is proposing to enhance its Clearing Fund methodology by
implementing an intraday volatility charge that may be collected by
NSCC to mitigate the risks presented by Members' adjusted intraday Net
Unsettled Positions and Net Balance Order Unsettled Positions
(hereinafter collectively referred to as ``Net Unsettled Positions'')
\4\ due to volatility in a Member's own trading activity (referred to
in this filing as ``volatility risk'') that may occur between the
collection of Members' Required Fund Deposits at the start of the day
and the collection of Members' Required Fund Deposits at the start of
the following Business Day.
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\4\ Net Unsettled Positions refer to net positions that have not
yet passed their settlement date or did not settle on their
settlement date. See Procedure XV (Clearing Fund Formula and Other
Matters) of the Rules, id.
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In connection with the adoption of an intraday volatility charge
and following an evaluation of the effectiveness of its margin
methodology generally, NSCC is also proposing to eliminate the Intraday
Backtesting Charge.\5\ NSCC would continue to maintain the Regular
Backtesting Charge that is assessed on Members' start of day portfolio,
as permitted by, and as described in, the Rules.\6\
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\5\ See Procedure XV, Section I.(B)(3) of the Rules, supra note
3.
\6\ Id.
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These proposed rule changes are described in greater detail below.
(i) Overview of the Required Fund Deposit and NSCC's Clearing Fund
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.\7\ The Required Fund Deposit serves as each
Member's margin.
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\7\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters), 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).
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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'').\8\ The aggregate of all
[[Page 43356]]
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.
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\8\ 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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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 deficiencies for the same underlying
reason.
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\9\ For backtesting comparisons, NSCC does not include actual
collateral posted by the Member or Backtesting Charges that have
already been collected from that Member. As described in this
filing, NSCC will also exclude Intraday Collections from its
intraday backtesting.
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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.\10\ Each Member's start of day Required Fund Deposit is
calculated overnight, based on the Member's prior end-of-day Net
Unsettled Positions, and notified to Members early the following
morning to be deposited by approximately 10:00 a.m. EST.\11\
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\10\ Supra note 3.
\11\ Procedure XV, Sections II(B) of the Rules, supra note 3.
The Rules provide that required deposits to the Clearing Fund are
due within one hour of demand, unless otherwise determined by NSCC.
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The volatility component of each Member's Required Fund Deposit is
designed to measure market price volatility of the start of day
portfolio and is calculated for Members' Net Unsettled Positions. The
volatility component is designed to capture the market price risk \12\
associated with each Member's portfolio at a 99th percentile level of
confidence. NSCC has two methodologies for calculating the volatility
component--a ``VaR Charge'' and a haircut-based calculation. The VaR
Charge applies to the majority of Net Unsettled Positions and is
calculated as the greater of (1) the larger of two separate
calculations that utilize a parametric Value at Risk (``VaR'') model,
(2) a gap risk measure calculation based on the concentration threshold
of the largest non-index position in a portfolio, and (3) a portfolio
margin floor calculation based on the market values of the long and
short positions in the portfolio.\13\ The VaR Charge usually comprises
the largest portion of a Member's Required Fund Deposit.
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\12\ Market price risk refers to the risk that volatility in the
market causes the price of a security to change between the
execution of a trade and settlement of that trade. This risk is also
referred to herein as market risk and volatility risk.
\13\ Procedure XV, Sections I(A)(1)(a)(i) and (2)(a)(i) of the
Rules, supra note 3.
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Certain Net Unsettled Positions are excluded from the calculation
of the VaR Charge pursuant to Sections I.(A)(1)(a)(ii) and
I.(A)(2)(a)(ii) of Procedure XV, and are instead subject to a haircut-
based calculation that is calculated by multiplying the absolute value
of the position by a percent that is determined by NSCC that is (i) not
less than 10% for securities whose volatility is less amenable to
statistical analysis and (ii) not less than 2% for securities whose
volatility is amenable to generally accepted statistical analysis only
in a complex manner.\14\ Securities that are subject to the haircut-
based calculation include unit investment trusts, corporate and
municipal bonds and Illiquid Securities (as such term is defined in the
Rules).\15\ Long Net Unsettled Positions in Family-Issued Securities
are also excluded from the VaR Charge and are subject to a separate,
haircut-based charge designed to mitigate wrong-way risk.\16\ The
charge that is applied to a Member's Required Fund Deposit with respect
to the volatility component is referred to as the volatility charge and
is the sum of the applicable VaR Charge and the haircut-based
calculation.
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\14\ Procedure XV, Sections I(A)(1)(a)(ii) and (2)(a)(ii) of the
Rules, supra note 3.
\15\ See Rule 1 (Definitions and Descriptions) and Procedure XV,
Sections I(A)(1)(a)(iii) and (2)(a)(iii) of the Rules, supra note 3.
\16\ Procedure XV, Sections I(A)(1)(a)(iv) and (2)(a)(iv) of the
Rules, supra note 3.
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The margin requirement differential (``MRD'') component charge is
calculated as the sum of an exponentially weighted moving average
(``EWMA'') of positive day over day changes over a 100-day look back
period in Member's (1) mark-to-market charge and (2) volatility charge,
times a multiplier calibrated based on backtesting results.\17\ The
portion of the MRD charge that is calculated as the EWMA of positive
day over day changes to the Member's volatility component over the look
back period is referred to as the volatility portion of the MRD charge.
This volatility portion of the MRD charge is designed to capture
variability in the volatility charge collected from the Member over the
look back period. However, the MRD charge would not capture significant
intraday volatility swings in a Member's positions, which may be
inconsistent with a Member's historical trading activity.
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\17\ See Sections I(A)(1)(e) and (2)(d) of Procedure XV of the
Rules, supra note 3.
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In addition to collecting Required Fund Deposits from Members at
the start of day, NSCC may collect additional amounts intraday.
Currently, NSCC may collect an additional intraday mark-to-market
charge.\18\ Intraday market moves and positions are tracked and this
additional mark-to-market charge may be collected if the difference
between the most recent mark-to-market price of a Member's net
positions and the most recent observed market price exceeds a
percentage of the Member's volatility charge. All intraday charges are
due within one hour of demand (unless otherwise determined by
NSCC).\19\
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\18\ See Sections I(B)(5) of Procedure XV of the Rules, supra
note 3.
\19\ See supra note 8.
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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 as the
Regular Backtesting Charge, or on an intraday basis as the Intraday
Backtesting Charge.\20\ 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.
When calculating a Member's backtesting coverage, NSCC excludes amounts
already collected as a Backtesting Charge from a Member in calculating
any applicable Backtesting Charge. Additionally, in response to
regulatory feedback, NSCC is enhancing the calculation of its intraday
backtesting coverage to exclude Intraday Collections. As described in
this filing, this enhancement will impact the
[[Page 43357]]
calculation of the Intraday Backtesting Charge.
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\20\ Section I(B)(3) of Procedure XV (Clearing Fund Formula and
Other Matters) of the Rules, supra note 3. See also Release No.
79167 (October 26, 2016), 81 FR 75883 (November 1, 2016) (File Nos.
SR-FICC-2016-006; SR-NSCC-2016-004).
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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.\21\ 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.\22\
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\21\ Id.
\22\ Id.
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NSCC calculates the Backtesting Charge monthly and, based on those
calculations, may either continue to impose an existing Backtesting
Charge, 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.
NSCC regularly assesses market risks as such risks relate to its
margining methodologies to evaluate whether margin levels are
commensurate with the particular risk attributes of each relevant
product, portfolio, and market. The proposed changes to include an
intraday volatility charge to its Clearing Fund methodology and to
eliminate the Intraday Backtesting Charge, as described below, is the
result of NSCC's regular review of the effectiveness of its margining
methodology. While the start of day volatility charge and other
components of the Clearing Fund are designed to predict market price
volatility that could occur after the collection of Required Fund
Deposits at the start of the day, large and unexpected volatility could
create exposures that are not captured by those amounts. Therefore, as
described in greater detail below, the proposed intraday volatility
charge would allow NSCC to address the risks that are presented by
significant changes to the size and composition of Members' portfolios
of Net Unsettled Positions after the collection of Members' Required
Fund Deposits at the start of the day that may be caused by, for
example, intraday market volatility or volatility in a Member's own
trading activity.
The proposal to eliminate the Intraday Backtesting Charge is driven
by a few considerations. Primarily, NSCC has determined, in connection
with recent regulatory feedback, that the current methodology for
calculating the Intraday Backtesting Charge may make an unreasonable
assumption that, as described in greater detail below, may lead to
undercounting of potential backtesting deficiencies. While NSCC
considered adopting alternative calculation methodologies, it has
instead determined that it will continue to be able to adequately
address both its intraday market risk exposures and its backtesting
coverage metrics if it eliminates the Intraday Backtesting Charge, as
described in greater detail below.
(ii) Proposed Intraday Volatility Charge
In order to better address the volatility risks presented by
Members' adjusted intraday Net Unsettled Positions between start of day
collections of Required Fund Deposits, NSCC is proposing to implement
an intraday volatility charge, which it may collect on an intraday
basis as described below.
In 2017, NSCC accelerated the time its trade guarantee attaches to
eligible transactions from midnight of one day after trade date
(``T+1'') to the point of trade comparison and validation for bilateral
submissions or to the point of trade validation for locked-in
submissions.\23\ In order to address the additional risks NSCC would
face in connection with guaranteeing trades at an earlier point in
time, NSCC enhanced its Clearing Fund formula. Among those
enhancements, NSCC adopted the MRD charge, an intraday backtesting
charge and revised its mark-to-market charge to be collected when
Members have intraday mark-to-market changes that are significant
enough that NSCC is exposed to an increased risk of loss as a result of
such Members' intraday trading activity.\24\ At that time, NSCC also
established intraday monitoring of volatility in its Members' Net
Unsettled Positions and currently monitors such volatility in 15-minute
increments between the collection of start of day Required Fund
Deposits and end of day settlement. NSCC did not, however, believe an
intraday volatility charge was necessary to address the risks presented
by the accelerated trade guarantee, and did not adopt this charge at
that time.
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\23\ See Securities Exchange Act Release Nos. 79598 (December
19, 2016), 81 FR 94462 (December 23, 2016) (File No. SR-NSCC-2016-
005); 79592 (December 19, 2016), 81 FR 94448 (December 23, 2016)
(File No. SR-NSCC-2016-803) (``ATG Rule Change''). See also Addendum
K of the Rules, supra note 3.
\24\ See id.
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Intraday Volatility Charge Calculation. Since that time, through
its regular monitoring, NSCC has occasionally observed significant
intraday changes to market price volatility and significant changes to
the size and composition of Members' portfolios of Net Unsettled
Positions that could cause the amount collected as the volatility
charge at the start of that Business Day (``start of day volatility
charge'') to no longer be sufficient to mitigate the volatility risks
that such positions present to NSCC. Therefore, NSCC believes it is
appropriate to implement an intraday volatility charge that, similar to
the current intraday mark-to-market charge, may be collected by NSCC
when certain thresholds are met. More specifically, NSCC is proposing
to utilize its existing intraday monitoring to determine when the
difference between a Member's (1) start of day volatility charge,
collected on that Business Day as part of the Member's start of day
Required Fund Deposit based on that Member's prior end-of-day Net
Unsettled Positions, and (2) a calculation of the volatility charge
based on that Member's adjusted intraday Net Unsettled Positions as of
a point intraday between the collection of the start of day Required
Fund Deposit and end of day settlement, exceeds 100 percent and the
amount that would be collected as an intraday volatility charge,
calculated as described below, would be greater than $250,000.
In addition to applying these quantitative thresholds, NSCC also
would not collect an intraday volatility charge in circumstances that
would be specified in the Rules, as discussed in greater detail below,
when the risk the proposed charge is designed to mitigate is expected
to be mitigated by either later submitted or corrected trading
activity. NSCC would continue to monitor intraday volatility in 15-
minute increments throughout the day, and the calculation of the
intraday volatility charge would be done at those intervals. While
collections may occur multiple times throughout the day, intraday
volatility charges are more likely to be collected later in the day,
after additional, and potentially offsetting, activity has been
submitted, as described in greater detail below.
The amount of intraday volatility charge that NSCC would collect
from a Member when the charge is applicable would be equal to the
difference between the start of day volatility charge and the intraday
calculation of that volatility charge, described above, reduced by the
amount collected from that Member at the start of that Business Day as
the volatility portion of the MRD
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charge.\25\ As described above, the volatility portion of the MRD
charge is designed to measure changes in the volatility charge over the
historic lookback period. However, risks presented by changes in
intraday volatility that exceed a 100 percent threshold are not
captured by the volatility portion of the MRD charge and NSCC believes
the proposed intraday volatility charge would provide it with a better
measure of these risks. Therefore, it would not be necessary for NSCC
to collect as part of the intraday volatility charge any amounts that
it has already collected as the volatility portion of the MRD charge
for that Business Day.
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\25\ See supra note 13.
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NSCC currently excludes long Net Unsettled Positions in Family-
Issued Securities from the calculation of the VaR Charge and instead
uses a haircut-based calculation for these positions (``FIS
charge'').\26\ The FIS charge is designed to measure the wrong-way risk
that could be presented by long Net Unsettled Positions in Family-
Issued Securities and is not a measurement of volatility risk or
considered a part of the volatility charge. Therefore, because Members
are charged the FIS charge separately from the volatility charge, NSCC
would exclude this FIS charge from both components of the intraday
volatility charge calculation.
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\26\ See Sections I(A)(1)(a)(iv) and (2)(a)(iv) of Procedure XV
of the Rules, supra note 3.
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Adjusted Intraday Net Unsettled Positions. In calculating the
volatility charge based on Members' intraday Net Unsettled Positions,
NSCC would adjust the Net Unsettled Positions by excluding any position
for which shares had either been delivered to the CNS System or
received by the Member from the CNS System to satisfy all or any
portion of that position. NSCC believes it would be appropriate to
assume, for purposes of this calculation, that positions for which the
shares have been delivered and received would settle at the end of the
day. By adjusting the intraday Net Unsettled Positions to exclude these
positions, the calculation of the intraday volatility charge would be
more effectively driven by any significant intraday changes to the
volatility risks presented by Members' adjusted intraday Net Unsettled
Positions.
Additionally, in calculating the intraday volatility charge, NSCC
would use the same inputs and parameters that were used in the
calculation of the start of day volatility charge, including,
initially, end of day price returns, such that, the calculation of the
volatility charge that would occur intraday for purposes of the
intraday volatility charge would use the same methodology as the
calculation of the start of day volatility charge but would occur later
in the day. While risk related to volatility in intraday prices is
addressed by the intraday mark-to-market charge, and NSCC believes it
is appropriate to use some of the same parameters and methodology in
the intraday volatility charge calculation as it would allow the
calculation to more accurately reflect the market price volatility
based on changes in Members' Net Unsettled Positions rather than be
driven by changes in those parameters, NSCC would explore ways to
enhance its capabilities, it may, in the future, use intraday price
returns for the calculation of the intraday volatility charge.
The proposed methodology would allow NSCC to measure the change in
the volatility charge to determine if such change presents NSCC with
exposures that are not adequately addressed by the start of day
volatility charge on deposit in the Clearing Fund. If the threshold is
met and NSCC determines it is appropriate to collect an intraday
volatility charge, that charge would equal the difference between the
two volatility charge calculations. By collecting an amount that is
measured as the difference between the two volatility charge
calculations, NSCC would be able to supplement the volatility charge
already on deposit in its Clearing Fund with an amount that measures
the change in volatility that has occurred since the Required Fund
Deposit was collected at the start of the day.
Thresholds in Applying the Charge. NSCC would only determine if an
intraday volatility charge is appropriate if two thresholds are met and
the exceptions to the intraday volatility charge, as described in more
detail below, are not applicable. The thresholds to the application of
the intraday volatility charge are (1) when the difference between the
two calculations of the volatility charge exceeds 100 percent, and (2)
the amount that would be calculated as an intraday volatility charge
would be greater than $250,000.
First, NSCC believes the 100 percent threshold is appropriate
because, in normal market conditions, intraday changes in volatility
that are lower than this threshold are more likely due to normal market
fluctuations, and NSCC believes that only an increase that is larger
than 100 percent would require mitigation through the intraday
volatility charge. However, risks presented by changes in intraday
volatility that exceed a 100 percent threshold could expose NSCC to
additional market price risk for which NSCC currently does not have
risk mitigation measures. Based on past observations, changes in the
calculated volatility charge that exceed this threshold have generally
occurred when a Member's portfolio composition changed significantly
due to increased volumes in either all or specific securities. The
proposed intraday volatility charge would provide NSCC with the ability
to mitigate this material change in risk.
Similar to the intraday mark-to-market charge, NSCC would retain
the discretion to lower this threshold if it determines that a
reduction in this threshold is appropriate to mitigate risks to NSCC,
for example during volatile market conditions or market events that
cause increases in trading volume, or when NSCC believes a lower
threshold is appropriate to mitigate risks presented by Members whose
portfolios may present relatively greater risks to NSCC on an overnight
basis. In circumstances when NSCC determines it is appropriate to
reduce the threshold, the reduced threshold would apply to all Members.
This discretion would allow NSCC to collect an intraday volatility
charge earlier in light of increased levels of volatility risks. In
these circumstances, a lower threshold would allow NSCC to more
proactively preserve the coverage of its Required Fund Deposit.
Second, NSCC also believes it is appropriate to apply an additional
threshold that would limit the collection of intraday volatility
charges to when the amount that would be collected would be greater
than $250,000. NSCC believes amounts below this threshold, which is the
minimum required deposit to the Clearing Fund, would be immaterial to
address any increased risk.
Exceptions to Collecting an Intraday Volatility Charge. As stated
above, in certain specified circumstances, NSCC would not collect an
intraday volatility charge from a particular Member or Members, despite
a calculation that exceeds the quantitative thresholds. NSCC is
proposing to amend the Rules to state that an intraday volatility
charge would not be collected if (a) trades submitted later in the day
would offset trades submitted earlier in the day, such that the
thresholds would not have been met if such activity had been submitted
earlier in the day, or (b) the threshold was met due to the submission
of an erroneous trade that can be corrected.
As stated above, NSCC would monitor volatility in 15-minute
increments
[[Page 43359]]
between the collection of start of day Required Fund Deposits and end
of day settlement. When the threshold is exceeded during normal market
conditions earlier in the trading day, NSCC would typically not collect
an intraday volatility charge until later in the day when Members have
had an opportunity to submit trading activity that would be expected to
offset trades submitted earlier in the day that caused the thresholds
to be met. Off-setting trading activity may be submitted to NSCC later
in the day in connection with Members' business model or trading
practices. Additionally, a system issue or other error could cause a
delay in the submission of activity.
NSCC believes that, in circumstances when later submitted activity
offsets earlier submitted activity, whether that is due to Member's
normal business practices or operational delays, an intraday volatility
charge would not be necessary because the risk presented by the
temporary increase in volatility would be expected to be mitigated by
other clearing activity or corrected submissions that is submitted
later in the day. As noted above, NSCC would monitor intraday
volatility in 15-minute increments throughout the day and would
continuously re-calculate the intraday volatility charge at those
intervals. Therefore, NSCC would be able to determine in the subsequent
calculations if later submitted or corrected trading activity was
adequate to mitigate the observed increase in volatility risk or if an
intraday volatility charge should be collected.
In determining not to collect an intraday volatility charge,
despite a threshold trigger, NSCC would utilize the same escalation
procedures that are currently in place when making similar
determinations with respect to its current authority to waive intraday
mark-to-market charges. Specifically, NSCC would utilize a
predetermined escalation matrix that identifies the level of the
required approver within the NSCC Market Risk group based on the amount
of the calculated intraday volatility charge would not be collected. A
decision not to collect the charge would be made based on documentation
provided to the required approver regarding the circumstances of the
calculated charge.
Application to Positions in Securities Financing Transactions. NSCC
has established a clearing service for securities financing
transactions (``SFT Clearing Service'') to make central clearing
available at NSCC for equity securities financing transactions
(``SFTs'').\27\ NSCC would include the intraday volatility charge among
the margin charges that are applicable to SFT positions cleared through
the SFT Clearing Service. NSCC would implement this change by amending
Section 12(c) of the proposed Rule 56 to include the intraday
volatility charge as one of the components of Required SFT Deposit of
an SFT Member, as such term is defined in Rules.\28\
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\27\ See Rule 56 (Securities Financing Transactions Clearing
Service) of the Rules, supra note 3.
\28\ Id.
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Transparency, Notification and Collection of Intraday Volatility Charge
The proposed intraday volatility charge would provide NSCC with an
important tool to address significant changes in the volatility risks
presented to NSCC, such that these risks presented by Members' adjusted
intraday Net Unsettled Positions are no longer adequately covered by
the Required Fund Deposit collected at the start of day.
The proposed change would provide Members with transparency in the
Rules regarding when and how NSCC may collect additional amounts to
address this increased risk. Members would also be able to continue to
use existing tools, including the ability to view the calculated
volatility charge in 15-minute increments throughout the Business Day
and the VaR (Value at Risk) Margin Calculator available in the NSCC
Risk Client Portal, to monitor their positions and anticipate any
potential intraday charges.
Additionally, and similarly to the process used today for the
intraday mark-to-market charge, NSCC would provide its Members notice
on days when there is increased volatility in the market, that an
intraday charge may be collected. If NSCC determines to collect an
intraday volatility charge pursuant to the Rules, it would issue a
notice by electronic mail to those Members who are subject to that
charge. Members would then be able to view the amount to be collected
in NSCC's Clearing Fund Management system. Members who receive that
notice would be required to fund the amount of the intraday volatility
charge within one hour of that notice, pursuant to Section II(B) of
Procedure XV.\29\ This notification and collection process would be
identical to the current process that is followed for the notification
and collection of the intraday mark-to-market process.
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\29\ Supra note 8.
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Proposed Intraday Volatility Charge and Other Margin Charges
As discussed above, the proposed intraday volatility charge would
be implemented with a calculation methodology that is similar to the
calculation of the current intraday mark-to-market charge. As noted
above, the intraday mark-to-market charge addresses the risk presented
by changes in market prices over the course of the day, where the
proposed intraday volatility charge would address the risk presented by
changes in a Member's own clearing activity that may occur over the
course of the day. Despite the difference in risks that these charges
are designed to address, both intraday charges would be applied with a
similar methodology. For example, both intraday charges would be
generally measured as the difference between the charge collected at
the start of the day and a calculation of that charge intraday. Both
intraday charges would also be triggered when a threshold is met, and
in both cases, NSCC would retain discretion in the ability to lower
that threshold. NSCC would also utilize the same notification process
for the proposed intraday volatility charge that currently used to
notify Members when an intraday mark-to-market charge is assessed. By
structuring the proposed intraday volatility charge similarly to the
current intraday mark-to-market charge, NSCC believes the proposal
would provide Members with predictability and clarity into how the
proposal charge would be calculated and assessed.
Currently, pursuant to Sections I(A)(1)(c) and I(A)(2)(c) of
Procedure XV, NSCC may collect an additional payment, referred to as
the ``special charge,'' from Members in view of price fluctuations in
or volatility or lack of liquidity of any security, based on factors
that NSCC determines to be appropriate.\30\ NSCC has rarely assessed a
special charge, but believes this ``special charge'' continues to be a
valuable risk management tool that would allow it to collect additional
amounts in the event of unpredictable, unusual or sudden market events
that present additional risks to NSCC that its margining methodology is
not able to predict. While the proposed intraday volatility charge
would provide NSCC with an additional tool to address events that cause
Members' positions to increase the levels of volatility risks, it will
be used only when it is triggered by the applicable calculation. When
the intraday volatility charge is triggered, a
[[Page 43360]]
special charge would not also be required from a Member to address the
same volatility risks. Likewise, if NSCC is exposed to volatility risks
that are not captured by the intraday volatility charge calculation or
by other available margin charges, NSCC would have the ability to
mitigate those risks through the collection of a special charge.
---------------------------------------------------------------------------
\30\ See supra note 3.
---------------------------------------------------------------------------
Finally, as noted above, the MRD charge is an additional component
of Members' Required Fund Deposit that is designed to capture some of
the risk presented by increased volatility between collection of
Required Fund Deposits.\31\ Larger increases in volatility that the MRD
charge is not able to predict and capture in the start of day
collection of Required Fund Deposits, however, will be captured by the
proposed intraday volatility charge. Because of the ability of
volatility portion of the MRD charge to manage the risk of some
increase to volatility between collection of Required Fund Deposits,
NSCC would adjust the amount of intraday volatility charge it would
collect from Members when the threshold is met by the amount of the
volatility portion of the MRD charge collected from a Member at the
start of that Business Day.
---------------------------------------------------------------------------
\31\ See supra note 17.
---------------------------------------------------------------------------
(iii) Proposal To Eliminate the Intraday Backtesting Charge
NSCC is also proposing to eliminate the Intraday Backtesting
Charge. The Backtesting Charge, which may be collected as an Intraday
Backtesting Charge or a Regular Backtesting Charge collected at the
start of the day, was adopted in 2016 shortly after NSCC implemented
the intraday mark-to-market charge as part of its proposal to
accelerate its trade guaranty (``ATG'').\32\ Intraday margin
surveillance, collection and backtesting performance were key issues
during the development and proposal of ATG. While NSCC had also
considered adopting an intraday volatility charge as part of the ATG
proposal, at that time it was decided that NSCC would continue to
monitor intraday volatility exposures, with the expectation of later
developing an intraday volatility charge. As noted above, the proposal
to now eliminate the Intraday Backtesting Charge is driven by a few
considerations.
---------------------------------------------------------------------------
\32\ Release No. 79167 (October 26, 2016), 81 FR 75883 (November
1, 2016) (File Nos. SR-FICC-2016-006; SR-NSCC-2016-004).
---------------------------------------------------------------------------
First, in connection with recent regulatory feedback, NSCC has
determined that the current methodology for calculating the Intraday
Backtesting Charge makes an unreasonable assumption that NSCC would
cease to act for a Member that has paid all of its intraday margin
requirements. As a result, this calculation methodology may
underestimate a Member's backtesting losses and undercounting potential
backtesting deficiencies. In light of this, NSCC considered revising
the methodology for calculating the Intraday Backtesting Charge to
exclude amounts it has already collected from the Member.\33\ However,
a calculation that disregards intraday margin collections would
penalize Members for making intraday margin deposits and be considered
double margining.
---------------------------------------------------------------------------
\33\ NSCC recently filed a proposed rule change to amend Section
I.(B)(3) of Procedure XV of the Rules to clarify that the
calculation methodology for the Backtesting Charge does not include
amounts already collected as a Backtesting Charge from that Member.
Release No. 93678 (November 30, 2021), 86 FR 69109 (December 6,
2021) (File No. SR-NSCC-2021-014).
---------------------------------------------------------------------------
More specifically, as stated above, NSCC's daily backtesting is
designed to measure the adequacy of each Member's Required Fund Deposit
by comparing the Required Fund Deposit for a Member with the simulated
liquidation gains/losses using the actual positions in that Member's
portfolio, and the actual historical security returns. Margin amounts
collected intraday from a Member are a part of their Required Fund
Deposit. If NSCC collects margin from a Member intraday, but does not
include that amount in its Required Fund Deposit in connection with its
backtesting, resulting in a backtesting deficiency and a subsequent
Intraday Backtesting Charge, that Member would have covered its risk to
NSCC twice--first as intraday margin collected from that Member and
second as an Intraday Backtesting Charge. Therefore, NSCC has
determined to eliminate the Intraday Backtesting Charge rather than
exclude amounts collected intraday from Members in its calculation.
Second, NSCC believes it will continue to be able to adequately
address both its intraday market risk exposures and its backtesting
coverage metrics if it eliminates the Intraday Backtesting Charge. On
an intraday basis, NSCC would continue to rely on both the intraday
mark-to-market charge and the proposed intraday volatility charge to
address intraday exposures presented by price volatility and changes to
its Members' positions intraday. Further, in connection with its daily
backtesting, NSCC will monitor the intraday backtesting metric
inclusive of all intraday collections to assess the continued
effectiveness of its intraday margining process. Additionally, NSCC
would maintain the Regular Backtesting Charge, which is collected at
the start of the day, to support its backtesting coverage. Studies
reviewing the impact of removing the Intraday Backtesting Charge on
NSCC's backtesting coverage metrics, described in greater detail below,
indicate that this proposal would not have a significant impact on
NSCC's ability to maintain its backtesting coverage target.
Therefore, given the deficiencies in the current calculation of the
Intraday Backtesting Charge and the risks related to adjustments to
this calculation that would address those deficiencies, and in light of
both the enhancements NSCC has made to its intraday margining since the
adoption of the Intraday Backtesting Charge as well as its proposal to
now adopt an intraday volatility charge, NSCC has determined it is
appropriate to eliminate the Intraday Backtesting Charge.
(iv) Proposed Changes to Procedure XV of the Rules
In order to implement the proposed intraday volatility charge, NSCC
would amend Procedure XV to add a new subsection 6 to Section I.(B) of
Procedure XV of the Rules. This new subsection would describe the
thresholds for collecting an intraday volatility charge, the exceptions
to the collection of the charge when those thresholds are met, and the
calculation of that charge. The proposed change would also describe
NSCC's discretion to reduce the 100 percent threshold and the
circumstances in which it may exercise that discretion.
The proposed rule change would, to a certain extent, mirror the
description of the current intraday mark-to-market charge, which has a
similar percent threshold and calculation and for which NSCC retains
similar discretion regarding the ability to reduce the percent
threshold. By using a similar calculation and applying similar
discretion to that already used for the intraday mark-to-market, NSCC
would adopt a rule change that is clear and understandable by its
Members.
In order to eliminate the Intraday Backtesting Charge, NSCC would
amend Section I.(B)(3) of Procedure XV, where the Backtesting Charge is
described, to eliminate references to the Intraday Backtesting Charge.
(v) Impact Study Results
With respect to the proposed intraday volatility charge, NSCC has
provided the Commission with the results of an impact study that
reviewed Member positions at 4:00 p.m. EST between January 3, 2020 and
May 28, 2021. This
[[Page 43361]]
study showed the proposal would have resulted in approximately eight
intraday volatility charges collected on an average day during that
time period, and such charges would have been an average of $31.6
million, ranging in size from $251 thousand to $1.35 billion.
With respect to the proposal to eliminate the Intraday Backtesting
Charge, NSCC has provided the Commission with the results of an impact
study that reviewed the impact the proposal would have had on both end
of day backtesting and intraday backtesting between February 2021 and
February 2022. During this time period, NSCC collected a daily average
of $30.0 million in total Intraday Backtesting Charge collected from 15
Members. The Intraday Backtesting Charges that made up this total
amount averaged approximately $2.0 million, ranging in size from $10
thousand to $21.1 million. While NSCC would not have collected these
amounts if the proposal was in place during this time period, the
results of the study showed that the end of day backtesting would have
remained above the 99% coverage target during that time period and
would have had an immaterial impact on intraday backtesting results,
causing backtesting to drop below the 99% coverage target slightly in
only two instances. The backtesting results would not be materially
impacted by the proposal because the Intraday Backtesting Charges
generally do not represent a large portion of the total Clearing Fund
collected from Members and the proposal to introduce an intraday
volatility charge would, when applicable, allow NSCC to collect
additional amounts.
(vi) Implementation Timeframe
NSCC would implement the proposed changes no later than 10 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 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 change is consistent with Section 17A(b)(3)(F) of
the Act,\34\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii),
each promulgated under the Act,\35\ for the reasons described below.
---------------------------------------------------------------------------
\34\ 15 U.S.C. 78q-1(b)(3)(F).
\35\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(23)(ii).
---------------------------------------------------------------------------
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 and be designed to promote the prompt and
accurate clearance and settlement of securities transactions.\36\ NSCC
believes the proposed change to implement an intraday volatility charge
is designed to assure the safeguarding of securities and funds which
are in its custody or control or for which it is responsible because it
is designed to mitigate changes in volatility that could occur intraday
and increase the risks to NSCC related to liquidating a Member's
portfolio following that Member's default. Specifically, the proposed
intraday volatility charge would allow NSCC to collect financial
resources to cover its exposures that it may face due to increases in
volatility that occur between collections of start-of-day Required Fund
Deposits.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Clearing Fund is a key tool that NSCC uses to mitigate
potential losses to NSCC associated with liquidating a Member's
portfolio in the event of Member default. Therefore, the proposed
change to include an intraday volatility charge among the Clearing Fund
components, when applicable, would enable NSCC to better address any
changes to market price volatility or the size of a Member's portfolio
of Net Unsettled Positions that occur intraday, such that, in the event
of Member default, NSCC's operations would not be disrupted and non-
defaulting Members would not be exposed to losses they cannot
anticipate or control. In this way, the proposed change to implement
the intraday volatility charge is designed to assure the safeguarding
of securities and funds which are in the custody or control of NSCC or
for which it is responsible, consistent with Section 17A(b)(3)(F) of
the Act.\37\
---------------------------------------------------------------------------
\37\ Id.
---------------------------------------------------------------------------
Furthermore, NSCC believes the proposal to eliminate the Intraday
Backtesting Charge is consistent with the requirements of Section
17A(b)(3)(F) of the Act because it would eliminate a charge that is
currently calculated based on an unreasonable assumption and is no
longer needed for NSCC to address its intraday market risk exposures
and backtesting coverage metrics. By eliminating this charge, the
proposal would allow NSCC to more accurately and, therefore,
effectively measure its intraday risk exposures, which NSCC believes
would promote the prompt and accurate clearance and settlement of
securities transactions. As such, NSCC believes that the proposed
change would be consistent with Section 17A(b)(3)(F) of the Act.\38\
---------------------------------------------------------------------------
\38\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) under the Act 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.\39\
---------------------------------------------------------------------------
\39\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
As described above, NSCC believes the proposed change to adopt an
intraday volatility charge 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. Specifically, NSCC believes that the proposed
intraday volatility charge would effectively mitigate the risks related
to intraday increases in volatility and would address the increased
risks NSCC may face related to liquidating a Member's portfolio
following that Member's default. Therefore, NSCC believes the proposal
would enhance NSCC's ability to effectively identify, measure and
monitor its credit exposures and would enhance its ability to maintain
sufficient financial resources to cover its credit exposure to each
participant fully with a high degree of confidence. As such, NSCC
believes the proposed change to adopt an intraday volatility charge is
consistent with Rule 17Ad-22(e)(4)(i) under the Act.\40\
---------------------------------------------------------------------------
\40\ Id.
---------------------------------------------------------------------------
NSCC also believes the proposal to eliminate the Intraday
Backtesting Charge is consistent with Rule 17Ad-22(e)(4)(i) under the
Act \41\ because it would eliminate a charge that is currently
calculated based on an unreasonable assumption and is no longer needed
for NSCC to address its intraday market risk exposures and backtesting
coverage metrics. By eliminating this charge, the proposal would allow
NSCC to more accurately and, therefore, effectively identify,
[[Page 43362]]
measure, monitor, and manage its credit exposures to participants. As
such, NSCC believes this proposed change is consistent with Rule 17Ad-
22(e)(4)(i) under the Act.\42\
---------------------------------------------------------------------------
\41\ Id.
\42\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(i) under the Act 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.\43\
---------------------------------------------------------------------------
\43\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
The Required Fund Deposits are made up of risk-based components (as
margin) that are calculated and assessed daily to limit NSCC's credit
exposures to Members. NSCC's proposed change to introduce an intraday
volatility charge is designed to more effectively address the risks
presented by significant intraday changes to market price volatility or
a Member's portfolio of Net Unsettled Positions. NSCC believes the
addition of the intraday volatility charge would enable NSCC to assess
a more appropriate level of margin that accounts for increases in these
volatility risks that may occur intraday. This proposed change is
designed to assist NSCC in maintaining a risk-based margin system that
considers, and produces margin levels commensurate with, the risks of
portfolios that experience significant volatility on an intraday basis.
Therefore, NSCC believes the proposed change to adopt an intraday
volatility charge is consistent with Rule 17Ad-22(e)(6)(i) under the
Act.\44\
---------------------------------------------------------------------------
\44\ Id.
---------------------------------------------------------------------------
NSCC also believes the proposal to eliminate the Intraday
Backtesting Charge is consistent with Rule 17Ad-22(e)(6)(i) under the
Act.\45\ Given the deficiencies in the current calculation of the
Intraday Backtesting Charge and the risks related to adjustments to
this calculation that would address those deficiencies, NSCC believes
that the proposal to eliminate the Intraday Backtesting Charge would
support its continued maintenance of a risk-based margin system that
considers, and produces margin levels commensurate with, the risks of
its Members' portfolios. As such, NSCC believes the proposal is
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\46\
---------------------------------------------------------------------------
\45\ Id.
\46\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(23)(ii) under the Act requires that NSCC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for providing sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in NSCC.\47\ NSCC is
proposing to amend the Rules to include a description of the intraday
volatility charge, including the thresholds that would trigger the
collection of the charge, the exceptions to the collection of the
charge when the thresholds are met, the method by which NSCC would
calculate that charge, and NSCC's discretion to reduce the percent
threshold that triggers the collection of the charge, including the
circumstances when NSCC may exercise this discretion.
---------------------------------------------------------------------------
\47\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------
Through these proposed amendments to the Rules, the proposal would
assist NSCC in providing its Members with sufficient information to
identify and evaluate the risks and costs, in the form of Required Fund
Deposits to the Clearing Fund, that they incur by participating in
NSCC. Additionally, the proposed intraday volatility charge would be
calculated in a way that is similar to the calculation of the current
intraday mark-to-market charge, as described in greater detail above,
providing Members with consistency and, therefore, a clearer
understanding of the methodology used to calculate this proposed
charge. The proposed changes would also disclose NSCC's discretion in
lowering the percent threshold that triggers the collection of the
charge and would provide examples of when such discretion may be
exercised.
In this way, NSCC believes the proposed changes are consistent with
Rule 17Ad-22(e)(23)(ii) under the Act.\48\
---------------------------------------------------------------------------
\48\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
NSCC believes that the proposed change to adopt an intraday
volatility charge could have an impact on competition. Specifically,
NSCC believes the proposed charge could burden competition because it
would result in larger Required Fund Deposit amounts for Members when
the intraday volatility charge is applicable and result in a Required
Fund Deposit that is greater than the amount calculated pursuant to the
current formula.
The impacts of this proposal on a particular Member would depend on
the size and composition of the Member's portfolio and the potential
market volatility of positions in that portfolio. The proposed change
is not designed in a way that is intended to or expected to impact
Members of a certain legal entity type or size or who employ a
particular business model. NSCC is proposing to specify in the Rules
the circumstances in which NSCC would not collect an intraday
volatility charge that is otherwise triggered by the thresholds. Such
circumstances would account for Members' business practices that may
result in the later submission of trading activity that would offset
trades submitted earlier in the day. As described above, NSCC would
also determine not to collect an intraday volatility charge if the
amount would be $250,000 or less. NSCC believes these exceptions to the
collection of the intraday volatility charge would mitigate any
unintended disparate impacts on Members of a certain size or who have a
certain business model. In this way, NSCC expects that Members that
present similar adjusted intraday Net Unsettled Positions, regardless
of the type or size of Member or a Member's particular business
practices, would have similar impacts on their Required Fund Deposit
amounts as a result of the proposal.
When the proposal results in a larger Required Fund Deposit, the
proposed change could burden competition for Members that have lower
operating margins or higher costs of capital compared to other Members.
However, the increase in Required Fund Deposit would be in direct
relation to the specific risks presented by each Member's adjusted
intraday Net Unsettled Positions, 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, because the
impact of the proposal on a Member is related to the specific risks
presented by that Member's clearing activity and not on the type or
size of a Member, NSCC believes that any burden on competition imposed
by the proposed change 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.
Additionally, NSCC would use apply specified, risk-based exceptions
to collecting the intraday volatility charge when the thresholds are
triggered. As described above, NSCC would not collect an intraday
volatility charge if the thresholds are triggered due to these
specified circumstances, rather than due
[[Page 43363]]
to an increase in risk exposures presented by a Member's adjusted
intraday Net Unsettled Positions that would not be mitigated by later
trading activity. In such cases, any burden on competition imposed on
Members who are assessed the charge as compared to Members who are not
assessed the charge due to these specified circumstances would be due
to the application of risk-based criteria that is specified in the
Rules and would be 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 the above described burden on competition that may be
created by the proposed intraday volatility charge would be necessary
in furtherance of the Act, specifically Section 17A(b)(3)(F) of the
Act.\49\ As stated above, the proposed intraday volatility charge is
designed to address the risks of increases in market price volatility
or other changes to a Member's portfolio on an intraday basis that
could increase the costs to NSCC of liquidating a Member portfolio in
the event of the Member's default. Specifically, the proposed intraday
volatility charge would allow NSCC to collect sufficient financial
resources to cover its exposure that it may face increased costs in
liquidating positions that experience intraday volatility that is not
captured by the start of day volatility charge or the volatility
portion of the MRD charge. Therefore, NSCC believes this proposed
change is necessary and appropriate in furtherance of the requirements
of Section 17A(b)(3)(F) of the Act, which requires that the Rules be
designed to assure the safeguarding of securities and funds that are in
NSCC's custody or control or which it is responsible.\50\
---------------------------------------------------------------------------
\49\ 15 U.S.C. 78q-1(b)(3)(F).
\50\ Id.
---------------------------------------------------------------------------
NSCC believes these proposed change would also support NSCC's
compliance with Rule 17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under
the Act, 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 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; and (y) 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.\51\
---------------------------------------------------------------------------
\51\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------
As described above, NSCC believes the introduction of the intraday
volatility charge would allow NSCC to employ a risk-based methodology
that would address the increased risks NSCC may face when intraday
volatility changes a Member's portfolio such that the volatility charge
and MRD charge collected at the start of the day no longer addresses
the risks these positions present to NSCC. Therefore, the proposed
change would better limit NSCC's credit exposures to Members, necessary
and appropriate in furtherance of the requirements of Rule 17Ad-
22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act.\52\
---------------------------------------------------------------------------
\52\ Id.
---------------------------------------------------------------------------
NSCC believes that the above-described burden on competition that
could be created by the proposed change would be appropriate in
furtherance of the Act because such change has 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 proposed intraday volatility charge
would also enable NSCC to produce margin levels more commensurate with
the risks and particular attributes of each Member's portfolio.
The proposed intraday volatility charge would do this by measuring
the change in volatility that impacts Members' adjusted Net Unsettled
Positions and could occur intraday. Therefore, because the proposed
changes are designed to provide NSCC with an appropriate measure of the
volatility risks presented by Members' portfolios, NSCC believes the
proposal is appropriately designed to meet its risk management goals
and its regulatory obligations.
NSCC believes it has designed the proposed changes in an
appropriate way in order to meet compliance with its obligations under
the Act. Specifically, the proposals would improve the risk-based
margining methodology that NSCC employs to set margin requirements and
better limit NSCC's credit exposures to its Members. Therefore, as
described above, NSCC believes the proposed change is necessary and
appropriate in furtherance of NSCC's obligations under the Act,
specifically Section 17A(b)(3)(F) of the Act \53\ and Rule 17Ad-
22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act.\54\
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78q-1(b)(3)(F).
\54\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------
NSCC does not believe the proposal to eliminate the Intraday
Backtesting Charge would impact competition. The proposed rule changes
would eliminate this charge from the Rules, such that it would not be
applicable to any Members or included in the calculation of any
Members' Required Fund Deposits. 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.
(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
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
[[Page 43364]]
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.
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-2022-009 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-2022-009. 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-2022-009 and should be submitted on
or before August 10, 2022.
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\55\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-15451 Filed 7-19-22; 8:45 am]
BILLING CODE 8011-01-P