[Federal Register Volume 87, Number 169 (Thursday, September 1, 2022)]
[Notices]
[Pages 53796-53805]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-18861]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95618; File No. SR-NSCC-2021-016)


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving of Proposed Rule Change To Enhance Capital 
Requirements and Make Other Changes

August 26, 2022.

I. Introduction

    On December 13, 2021, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2021-016 (the ``Proposed 
Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed 
Rule Change was published for comment in the Federal Register on 
December 29, 2021.\3\ On January 26, 2022, pursuant to Section 19(b)(2) 
of the Act,\4\ the Commission designated a longer period within which 
to approve, disapprove, or institute proceedings to determine whether 
to approve or disapprove the Proposed Rule Change.\5\ On March 23, 
2022, the Commission instituted proceedings to determine whether to 
approve or
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 93856 (December 22, 
2021), 86 FR 74185 (December 29, 2021) (File No. SR-NSCC-2021-016) 
(``Notice of Filing'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 94068 (January 26, 
2022), 87 FR 5544 (February 1, 2022) (SR-NSCC-2021-016).

---------------------------------------------------------------------------

[[Page 53797]]

disapprove the Proposed Rule Change.\6\ On June 23, 2022, the 
Commission designated a longer period for Commission action on the 
proceedings to determine whether to approve or disapprove the Proposed 
Rule Change.\7\ The Commission received comment letters on the Proposed 
Rule Change.\8\ For the reasons discussed below, the Commission is 
approving the Proposed Rule Change.\9\
---------------------------------------------------------------------------

    \6\ Securities Exchange Act Release No. 94494 (March 23, 2022), 
87 FR 18444 (March 30, 2022) (SR-NSCC-2021-016).
    \7\ Securities Exchange Act Release No. 94168 (June 23, 2022), 
87 FR 38792 (June 29, 2022) (SR-NSCC-2021-016).
    \8\ Comments are available at https://www.sec.gov/comments/sr-nscc-2021-016/srnscc2021016.htm. The Commission received comments on 
April 22-23, 2022, that address market conduct generally. However, 
additional discussion is unnecessary because the comment letters do 
not bear on the Proposed Rule Change.
    \9\ Capitalized terms not defined herein are defined in NSCC's 
Rules & Procedures (``Rules''), available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    NSCC proposes to amend its Rules to (A) increase the capital 
requirements applicable to its members,\10\ (B) revise its credit risk 
monitoring system, and (C) make certain other clarifying, technical, 
and supplementary changes to implement changes (A) and (B).
---------------------------------------------------------------------------

    \10\ NSCC states that these capital requirements have not been 
updated in over 20 years. See Notice of Filing, supra note 3, at 
74185.
---------------------------------------------------------------------------

A. Changes to NSCC's Capital Requirements for Members and Limited 
Members

i. Members
    U.S. Broker-Dealer Members: NSCC proposes to increase its minimum 
excess net capital (``Excess Net Capital'') requirements for its U.S. 
broker-dealer members.\11\ A comparison of NSCC's current and proposed 
minimum Excess Net Capital requirements is as follows:
---------------------------------------------------------------------------

    \11\ NSCC proposes to define ``Excess Net Capital'' as the net 
capital greater than the minimum required, as calculated in 
accordance with the broker-dealer's regulatory and/or statutory 
requirements.

----------------------------------------------------------------------------------------------------------------
                                                                                      Proposed
                                                                  ----------------------------------------------
            Clearing status                      Current                                   Minimum excess net
                                                                        VaR tier                capital
----------------------------------------------------------------------------------------------------------------
Self-Clearing.........................  $500,000.................           <$100,000  $1 million Excess Net
                                                                      100,000-500,000   Capital.
                                                                             >500,000  $2.5 million Excess Net
                                                                                        Capital.
                                                                                       $5 million Excess Net
                                                                                        Capital.
Clears for others.....................  $1 million...............            <100,000  $2.5 million Excess Net
                                                                      100,000-500,000   Capital.
                                                                             >500,000  $5 million Excess Net
                                                                                        Capital.
                                                                                       $10 million Excess Net
                                                                                        Capital.
----------------------------------------------------------------------------------------------------------------

    As is the case with the current capital requirements applicable to 
Registered Broker-Dealers, the enhanced capital requirements for U.S. 
broker-dealers would depend on whether a member self-clears or clears 
for others. NSCC states that a broker-dealer that clears transactions 
for others has the potential to present different and greater risks to 
NSCC than a broker-dealer that clears transactions only for itself 
because it could clear for a large number of correspondent clients 
(i.e., indirect participants), which would expand the scope and volume 
of risk presented to NSCC and the direct participant itself when the 
indirect participant's trades are submitted to NSCC for settlement via 
the direct participant.\12\ The indirect nature of this risk exposure 
also increases risk to NSCC as there is generally less transparency 
into the indirect activity versus if the direct participant generated 
all of the activity itself.\13\ NSCC states the proposed heightened 
capital requirements for these members would help ensure that NSCC is 
better able to manage the material risks to NSCC arising from these 
arrangements.\14\
---------------------------------------------------------------------------

    \12\ See Notice of Filing, supra note 3, at 74189.
    \13\ See id.
    \14\ See id.
---------------------------------------------------------------------------

    Rather than continue to set fixed minimum capital requirements,\15\ 
NSCC proposes to implement a tiered approach based on the level of risk 
the U.S. broker-dealer presents to NSCC, as measured by its daily 
volatility component calculations. NSCC proposes to use, in general 
terms, calculations from its value-at-risk (``VaR'') \16\ model and 
associated Member charges as a measure of market risk in order to 
categorize Members into those that pose relatively minimal risk 
exposure, moderate risk exposure, or higher risk exposure to NSCC 
(``VaR Tier''). The VaR Tiers would require those members that bring 
more volatility (i.e., risk) into the clearinghouse to hold more 
capital.
---------------------------------------------------------------------------

    \15\ NSCC states, as background, that, in 2013, it considered 
increasing the fixed minimum capital requirements to much higher 
amounts, which was never proposed based on member feedback objecting 
that such requirements would be too high, rigid, and burdensome. See 
id. at 74186.
    \16\ A member's VaR Tier is based on its volatility charge, 
which is one of the major components of its margin requirement and 
which is calculated daily and collected at the start of each 
business day. To calculate the volatility charge, NSCC uses a VaR 
model, which provides an estimate of the maximum loss in a portfolio 
assuming a 3 day time horizon and 99% confidence interval. See id. 
at 74189.
---------------------------------------------------------------------------

    NSCC states that this tiered approach is tailored to better reflect 
the volatility risk presented by U.S. broker-dealer members.\17\ 
Currently, the minimum capital requirements for U.S. broker-dealers 
only consider the risk of membership type (i.e., self clears or clears 
for others), without considering any other risks. NSCC would continue 
to consider membership type, but would also incorporate volatility risk 
of the U.S. broker-dealer's own positions at NSCC (i.e., a measurement 
of the risk that the member's transactions pose to NSCC) in order to 
more strategically group U.S. broker-dealer Members into tiers, with 
each tier being assigned a specific minimum capital requirement.\18\
---------------------------------------------------------------------------

    \17\ See id. at 74196.
    \18\ See id.
---------------------------------------------------------------------------

    Additionally, NSCC states that U.S. broker-dealer members with 
lower Excess Net Capital tend to present greater relative risk to NSCC 
based on NSCC's analysis of the current average VaR margin requirement 
of each member divided by the current excess net capital of each member 
(``VaR/ENC''), with this analysis done for each member within NSCC.\19\ 
Specifically, that analysis shows that members with excess net capital 
of less than $5 million have an average VaR/ENC of 15 percent, which 
moved to 13 percent for members with excess net capital of $5-10 
million, to 10 percent for members with excess net capital of $10-50 
million, to 3 percent for members with excess net capital of $50-100 
million, to 7 percent for members with excess net capital of

[[Page 53798]]

$100-500 million, and, finally, to 2 percent for members with excess 
net capital greater than $500 million.\20\
---------------------------------------------------------------------------

    \19\ See Letter from Michael Leibrock, Managing Director, 
Counterparty Credit Risk Management, DTCC, at 2-3 (March 10, 2022) 
(``NSCC Response Letter'').
    \20\ See id.
---------------------------------------------------------------------------

    NSCC also performed the same analysis to compare U.S. broker-dealer 
members' VaR to their Excess Net Capital under the proposed new minimum 
capital requirements, to understand the impact on this relationship 
that the new minimum capital requirements would have. Based on this 
analysis, NSCC states that if the proposed increase in Excess Net 
Capital requirements had been applied, then the average VaR/ENC ratio 
declines to 7 percent for members with excess net capital less than $5 
million, and 9 percent for members with excess net capital of $5-10 
million, which aligns more closely to members with greater excess net 
capital.\21\ Thus, the analysis demonstrates that the risk to NSCC, as 
measured through the VaR/ENC ratio, decreases and allows the risk to be 
more consistent across all NSCC members.\22\ NSCC relied upon these 
analyses, in conjunction with its analysis of the impact on its current 
membership, to identify the proposed VaR tiers and the corresponding 
minimum capital requirements, which it believes are reasonable.
---------------------------------------------------------------------------

    \21\ See id. In addition, as part of the Proposed Rule Change, 
NSCC filed Exhibit 3--NSCC Impact Studies, which provided analysis 
on the rationale for and impact of the proposal. Pursuant to 17 CFR 
240.24b-2, NSCC requested confidential treatment of Exhibit 3. The 
confidential information provided more granular support for this 
analysis, and it includes a detailed analysis of the impact of each 
proposed minimum capital requirement on the current membership of 
NSCC, by category, looking at the members' current VaR over the 
preceding twelve months as compared to their capital levels. NSCC 
performed this analysis on a member-by-member basis, using each 
member's actual historical VaR data (based on their particular 
activity at NSCC) and ENC levels, and provided that member-level 
information to the Commission, both to identify which members would 
be impacted by the proposal and to show the differences in VaR/ENC 
ratio for each member under both the current and proposed minimum 
capital requirements.
    \22\ In addition, NSCC stated that it analyzed stress testing 
results, which showed that broker-dealer members with smaller 
capital bases are exposed to the risk of losses exceeding their 
current Excess Net Capital requirements under a stressed scenario. 
Notice, supra note 3, at 74196. NSCC also included the stress 
testing results as part of the confidential Exhibit 3 referenced in 
note 21 supra.
---------------------------------------------------------------------------

    As part of the tiered approach, a member's daily volatility 
component may exceed its then-current VaR Tier four times over a 
rolling 12-month period.\23\ Upon the fifth instance, the member would 
be moved to the next-greatest VaR Tier.\24\ The member would then have 
60 calendar days from that date to meet the higher required minimum 
Excess Net Capital for that VaR Tier and would remain in that greater 
VaR Tier for no less than one continuous year from the date of the move 
before being eligible to move to a lesser VaR Tier. NSCC states that 
U.S. broker-dealer members could move between tiers based on sustained 
changes to their daily volatility component, thus allowing them to have 
control over the tier in which they are placed and, in turn, the 
capital they need to maintain.\25\
---------------------------------------------------------------------------

    \23\ The VaR Tiers were designed to capture the VaR Tier that 
each member falls into approximately 99% of the time. See supra note 
15. Given there are approximately 252 trading days per year, the 
firm would fall below the 99% if it exceeded its current VaR Tier on 
more than two trading days in a rolling 12 month period. See Notice 
of Filing, supra note 3, at 74197.
    \24\ However, if the member's daily volatility component also 
exceeded such next-greatest VaR Tier five times during the preceding 
12-month period, the member would be moved to the greatest VaR Tier.
    \25\ See Notice of Filing, supra note 3, at 74197.
---------------------------------------------------------------------------

    Newly admitted members would be placed into the applicable middle 
VaR Tier in the table above, unless NSCC determines, based on 
information provided by or concerning the member's anticipated trading 
activity, that the member should be placed into the greatest VaR Tier. 
The new member would remain in the initial tier for the first 12 months 
of membership before being eligible to move to the lower VaR Tier.
    NSCC states that, based on its historical experience with the daily 
volatility components of newly admitted Members including such Members' 
own projected trading activity,\26\ it would be appropriate to place 
newly admitted Members into the applicable middle VaR Tier in the table 
above for the first 12 months of membership unless NSCC has determined 
that the Member's anticipated VaR Tier based on its anticipated trading 
activity would be the greatest VaR Tier.\27\
---------------------------------------------------------------------------

    \26\ For example, if the proposed VaR Tiers had been in effect 
for the past two years (but newly admitted Members were not 
automatically placed in at least the middle VaR Tier), only one U.S. 
broker-dealer applicant would have belonged in the lowest VaR Tier 
at admittance, but that firm then had trading activity that placed 
it in the middle VaR Tier in the first month and the highest VaR 
Tier in the second month of membership. See id. at 74190. NSCC 
provided more granular support for this analysis on a confidential 
basis. See supra notes 19-21.
    \27\ See Notice of Filing, supra note 3, at 74190.
---------------------------------------------------------------------------

    U.S. Bank and Trust Company Members: For members who are U.S. banks 
or U.S. trust companies who are also banks,\28\ NSCC proposes to (1) 
change the capital measure from equity capital to common equity tier 1 
capital (``CET1 Capital''),\29\ (2) raise the minimum capital 
requirements from $50 million in equity capital to $500 million in CET1 
Capital, and (3) require such members to be well capitalized (``Well 
Capitalized'').\30\ Under the proposal, a member may satisfy these 
requirements if the member's parent holding company maintains the 
minimum capital requirements and guarantees the member's obligations to 
NSCC. The proposal would align NSCC's capital requirements with banking 
regulators' changes to regulatory capital requirements over the past 
several years, which have standardized and harmonized the calculation 
and measurement of bank capital and leverage throughout the world.\31\ 
Consistent with these changes by banking regulators, NSCC states that 
it believes that the appropriate capital measure for members that are 
U.S. banks and trust companies should be CET1 Capital and that NSCC's 
capital requirements for Members should be enhanced to be consistent 
with these increased regulatory capital requirements.\32\ NSCC further 
states that it believes the proposed capital requirement for banks 
better measures the capital available to bank members to absorb losses 
arising out of their clearance and settlement activities at NSCC or 
otherwise, and would help NSCC more effectively manage and mitigate the 
credit risks posed by its members while providing fair and open access 
to membership at NSCC.\33\
---------------------------------------------------------------------------

    \28\ For U.S. trust companies who are not banks, NSCC is not 
changing its existing capital requirement of $10 million.
    \29\ NSCC proposes to define ``CET1 Capital'' as an entity's 
common equity tier 1 capital, calculated in accordance with such 
entity's regulatory and/or statutory requirements.
    \30\ NSCC proposes to incorporate the definition of ``Well 
Capitalized'' as that term is defined by the Federal Deposit 
Insurance Corporation in its capital adequacy rules and regulations. 
See 12 CFR 324.403(b)(1).
    \31\ See Notice of Filing, supra note 3, at 74190. NSCC further 
states that it believes these enhanced capital requirements better 
measure the capital available to members to absorb losses arising 
out of their clearance and settlement activities at NSCC or 
otherwise and would help NSCC more effectively manage and mitigate 
the credit risks posed by its members while providing fair and open 
access to membership at NSCC. See id. at 74194.
    \32\ See id.
    \33\ See id. NSCC also provided, in the confidential information 
submitted as part of this proposed rule change, an analysis of U.S. 
banks' capital to determine the appropriate level of capital 
requirement.
---------------------------------------------------------------------------

    Additionally, NSCC states that requiring U.S. banks and trust 
companies to be Well Capitalized ensures that Members are well 
capitalized while also allowing CET1 Capital to be relative to either 
the risk-weighted assets or average total assets of the bank or trust 
company.\34\ NSCC

[[Page 53799]]

further states that expressly tying the definition of Well Capitalized 
to the FDIC's definition of ``well capitalized'' will ensure that the 
proposed requirement keeps pace with future changes to regulatory 
capital requirements.\35\
---------------------------------------------------------------------------

    \34\ See id.
    \35\ See id.
---------------------------------------------------------------------------

Non-U.S. Broker-Dealer and Bank Members
    Currently, a Member who is a non-U.S. broker-dealer or bank is 
subject to a multiplier that requires such Member to maintain capital 
of either 1.5, 5, or 7 times its otherwise-applicable capital 
requirements.\36\
---------------------------------------------------------------------------

    \36\ The applicable multiplier is based on which generally 
accepted accounting standards (``GAAP'') the non-U.S. Member uses to 
prepare its financial statements, when not prepared in accordance 
with U.S. GAAP. See Addendum O of the Rules, supra note 7.
---------------------------------------------------------------------------

    Non-U.S. Broker-Dealers: NSCC proposes to require non-U.S. broker-
dealer members to maintain a minimum of $25 million in total equity 
capital. NSCC states the multiplier was designed to account for the 
less transparent nature of accounting standards other than U.S. 
GAAP.\37\ However, given that accounting standards have converged over 
the years, NSCC no longer believes the multiplier is necessary and its 
retirement would be a welcomed simplification for both NSCC and its 
members.\38\
---------------------------------------------------------------------------

    \37\ See id. at 74191.
    \38\ See id. at 74191.
---------------------------------------------------------------------------

    Additionally, NSCC states its approach to managing credit risk is 
multifaceted, which includes requirements of operational capability in 
addition to financial responsibility.\39\ Based on its experience, NSCC 
believes the flat equity capital requirement is warranted for non-U.S. 
broker-dealers based on the added jurisdictional and regulatory risks, 
while still allowing for fair and open access to NSCC membership.\40\
---------------------------------------------------------------------------

    \39\ NSCC Response Letter, supra note 19, at 2.
    \40\ See Notice of Filing, supra note 3, at 74195.
---------------------------------------------------------------------------

    Non-U.S. Banks: Like U.S. bank members, NSCC proposes that non-U.S. 
bank members maintain at least $500 million in CET1 Capital. NSCC 
proposes additional requirements for non-U.S. bank members as follows: 
(1) comply with the greater of (i) the member's home country minimum 
capital and ratio requirements, or (ii) the minimum capital and ratio 
standards promulgated by the Basel Committee on Banking 
Supervision,\41\ (2) provide an attestation for itself, its parent 
bank, and its parent bank holding company detailing the minimum capital 
requirements and capital ratios required by their home country 
regulator,\42\ and (3) notify NSCC of (i) any breach of its minimum 
capital and ratio requirements within two Business Days, or (ii) any 
changes to its requirements within 15 calendar days. Like U.S. bank 
members, NSCC proposes that a non-U.S. bank member may satisfy these 
requirements if the member's parent holding company maintains the 
minimum capital and other requirements and guarantees the member's 
obligations to NSCC.
---------------------------------------------------------------------------

    \41\ See Basel Committee on Banking Supervision, The Basel 
Framework, available at https://www.bis.org/basel_framework/index.htm?export=pdf. NSCC states that the proposal will align 
NSCC's capital requirements with banking regulators' changes to 
regulatory capital requirements over the past several years, which 
have standardized and harmonized the calculation and measurement of 
bank capital and leverage throughout the world. See Notice of 
Filing, supra note 3, at 74190. See also supra note 30. NSCC 
proposes tying its minimum requirement to the requirements 
promulgated by the Basel Committee on Banking Supervision to ensure 
that its non-U.S. bank members meet minimum international standards 
where their home country requirements may be more lenient.
    \42\ NSCC also proposes to require non-U.S. bank members to 
periodically provide new attestations on at least an annual basis 
and upon request by NSCC.
---------------------------------------------------------------------------

Other Types of Members
    Currently, an entity applying to be a Member other than a 
Registered Broker-Dealer, bank or trust company is required to satisfy 
such minimum standards of financial responsibility as determined by 
NSCC. NSCC proposes to adopt more specific standards for different 
member types.
    Securities Exchanges: Currently, NSCC does not provide a capital 
requirement standard for national securities exchanges. NSCC proposes 
to require that a Member that is a national securities exchange 
registered under the Exchange Act and/or a non-U.S. securities exchange 
or multilateral trading facility must have and maintain at all times at 
least $100 million in equity capital. There are only a few exchanges 
that are members of NSCC. These exchanges became members many years ago 
to address a processing structure that is no longer in place at 
NSCC.\43\ An exchange does not need to be a member of NSCC to submit 
trades of NSCC members for clearance and settlement, and NSCC does not 
anticipate that any other exchanges would seek to become members.\44\ 
NSCC is proposing these new capital requirements to address the 
potential credit risk posed by the current exchange members due to the 
systemic importance of these members and the need to hold these members 
to a consistent, high standard to ensure that they have sufficient 
capital to fulfill their systemically important role.\45\
---------------------------------------------------------------------------

    \43\ NSCC Response Letter, supra note 19, at 6.
    \44\ See id.
    \45\ See Notice of Filing, supra note 3, at 74192.
---------------------------------------------------------------------------

    Index Receipt Agent: Currently, NSCC does not provide a capital 
requirement standard for Index Receipt Agents, which are exchange-
traded funds agents that serve a number of functions in the create/
redeem process. NSCC proposes to require that a broker-dealer member 
that is acting as an Index Receipt Agent must have and maintain at all 
times minimum Excess Net Capital of $100 million. NSCC states that this 
aspect of the proposal would reflect the systemic risk presented by the 
potential failure of an Index Receipt Agent. The failure of an Index 
Receipt Agent could present systemic risk because such failure could 
potentially result in disruptions at exchange-traded funds for which 
the Index Receipt Agent acts. As a result of this systemic risk, NSCC 
proposes to require Members acting as Index Receipt Agents to hold a 
moderately sized capital base to support this business function.
    All Other Members: For all other members, NSCC proposes that the 
Member must maintain compliance with its home country's minimum 
financial requirements. NSCC also proposes that it may, based on the 
information provided or concerning the Member, assign an additional 
minimum financial requirement to the Member, which it will determine 
based on how closely it resembles another membership type and its risk 
profile.\46\
---------------------------------------------------------------------------

    \46\ Under the proposal, NSCC would be obligated to promptly 
notify and discuss any additional minimum financial requirement with 
the member applicant or member.
---------------------------------------------------------------------------

ii. Limited Members
    Limited Members are authorized to use only certain specified NSCC 
services, as compared to Members who may generally access all NSCC 
services.\47\ Currently, a Limited Member that is a Mutual Fund/
Insurance Services Member and/or Fund Member that is a U.S. bank or 
trust company is required to have a Tier 1 risk based capital (``RBC'') 
ratio of 6% or greater.\48\ Additionally, Settling Bank Only Members 
are currently subject to standards of financial responsibility that 
NSCC may promulgate.\49\
---------------------------------------------------------------------------

    \47\ See Section 2 of Rule 2 of the Rules, supra note 7.
    \48\ See Sections 2.B.2 and 3.B.2 of Addendum B of the Rules, 
supra note 7.
    \49\ See Section 7.B of Addendum B of the Rules, supra note 7.
---------------------------------------------------------------------------

    NSCC proposes that these types of members must maintain a Tier 1 
RBC

[[Page 53800]]

ratio (``Tier 1 RBC Ratio'') \50\ equal to or greater than the Tier 1 
RBC Ratio that would be required for such members to be Well 
Capitalized. NSCC proposes to have the definition of Well Capitalized 
expressly tied to the FDIC's definition of ``well capitalized.'' \51\ 
NSCC states that by tying its definition of ``Well Capitalized'' to 
that of the FDIC's definition, NSCC will ensure that the proposed 
requirement will keep pace with future changes to banking regulators' 
regulatory capital requirements.\52\
---------------------------------------------------------------------------

    \50\ NSCC proposes to define ``Tier 1 RBC Ratio'' as the ratio 
of an entity's tier 1 capital to its total-risk weighted assets, 
calculated in accordance with such entity's regulatory and/or 
statutory requirements. NSCC is not proposing changes to its capital 
requirements for U.S. trust companies that do not calculate its Tier 
1 risk-based capital ratio, which is currently $2 million in equity 
capital. See Sections 2.B.2 and 3.B.2 of Addendum B of the Rules, 
supra note 7.
    \51\ See supra note 29.
    \52\ See Notice of Filing, supra note 3, at 74192.
---------------------------------------------------------------------------

iii. Implementation Timeframe
    NSCC proposes to implement the proposed changes to its membership 
capital requirements one year after the Commission's approval of the 
Proposed Rule Change.\53\ During the one-year period, NSCC would 
periodically provide members with an estimate of their capital 
requirements based on the proposal.\54\
---------------------------------------------------------------------------

    \53\ The changes to NSCC's Watch List and enhanced surveillance 
list discussed in Section II.B below will not be subject to the one 
year delayed implementation.
    \54\ See Notice of Filing, supra note 3, at 74193.
---------------------------------------------------------------------------

B. Changes to NSCC's Watch List and Enhanced Surveillance List

    NSCC currently uses two credit risk monitoring systems: a Watch 
List and a separate list of members subject to enhanced surveillance 
(``enhanced surveillance list''). The current Watch List includes 
members that have either (1) receive a heightened credit risk rating 
based on NSCC's Credit Risk Rating Matrix (``CRRM''),\55\ or (2) been 
deemed to pose a heightened credit risk to NSCC or other members.\56\ 
NSCC may require a member placed on the Watch List to post additional 
collateral above the member's margin calculated pursuant to NSCC's 
margin methodology.\57\ Members on the Watch List are also subject to 
more thorough monitoring by NSCC of its financial condition and 
operational capability.\58\
---------------------------------------------------------------------------

    \55\ NSCC members generally are subject to the CRRM, in which 
each member is rated on a scale of one to seven with seven 
reflecting the highest credit risk posed to NSCC. Members who 
receive a CRRM rating of five to seven are currently, automatically 
placed on the Watch List. See Rule 1 and Section 4(b) of Rule 2B of 
the Rules, supra note 7.
    \56\ See Rule 1 and Sections 4(b)(ii) and (c) of Rule 2B of the 
Rules, supra note 7. In making its determination, NSCC may consider 
any information NSCC obtains through continuously monitoring its 
members for compliance with its membership requirements. See Section 
4(d) of Rule 2B of the Rules, supra note 7.
    \57\ See Section 4(e) of Rule 2B and Procedure XV of the Rules, 
supra note 7.
    \58\ See Section 4(f) of Rule 2B of the Rules, supra note 7.
---------------------------------------------------------------------------

    NSCC also maintains a separate enhanced surveillance list, which 
includes members who are subject to a more thorough monitoring of its 
financial condition and operational capability based on NSCC's 
determination that the member poses heightened credit risks, which may 
include members already on or soon to be on the Watch List.\59\ Members 
on the enhanced surveillance list are reported to NSCC's management 
committees, are regularly reviewed by NSCC senior management, and may 
be required to make more frequent financial disclosures to NSCC.\60\
---------------------------------------------------------------------------

    \59\ See id.
    \60\ See id.
---------------------------------------------------------------------------

    NSCC believes that maintaining two separate lists has confused 
various NSCC stakeholders,\61\ so NSCC proposes to remove references to 
an enhanced surveillance list from its Rules.\62\ NSCC also proposes to 
remove members with a CRRM rating of five from being automatically 
included on the Watch List. NSCC states that members with a CRRM rating 
of five represent the largest single CRRM rating category, but NSCC 
does not believe all such members present heightened credit 
concerns.\63\ NSCC would still retain the authority to place a member 
with a CRRM rating of five on the Watch List or otherwise if NSCC deems 
the member poses a heightened risk to NSCC. NSCC believes that these 
procedures would allow it to appropriately monitor the credit risks 
presented to it by its members and that the enhanced surveillance list 
is not necessary because members on the enhanced surveillance list are 
subject to the same potential consequences as members placed on the 
Watch List.\64\
---------------------------------------------------------------------------

    \61\ See Notice of Filing, supra note 3, at 74193.
    \62\ For any members currently on the enhanced surveillance list 
that are not also on the Watch List, NSCC will add these members to 
the Watch List. See id. at 74193. NSCC also proposes to clarify in 
its Rules that members on the Watch List are reported to NSCC's 
management committees and regularly reviewed by NSCC's senior 
management.
    \63\ See id. at 74193. NSCC states that the majority of members 
with a CRRM rating of 5 are either rated ``investment grade'' by 
external rating agencies or, in the absence of external ratings, 
NSCC believes are equivalent to investment grade, as many of these 
members are primary dealers and large foreign banks. See id.
    \64\ See id. at 74188, 74193.
---------------------------------------------------------------------------

C. Other Changes

    NSCC proposes to (1) revise or add headings and sub-headings as 
appropriate, (2) revise defined terms and add appropriate defined terms 
to facilitate the proposed changes, (3) rearrange and consolidate 
paragraphs to promote readability, (4) fix typographical and other 
errors, and (5) make specified other changes in order to improve 
clarity and the accessibility and transparency of the Rules.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \65\ provides that the Commission 
shall approve a proposed rule change of a self-regulatory organization 
if it finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After careful review of the Proposed Rule Change 
and consideration of the comments on the proposal, the Commission finds 
that the Proposed Rule Change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to NSCC. In 
particular, the Commission finds that the Proposed Rule Change is 
consistent with Sections 17A(b)(3)(F) and (b)(3)(I) of the Act,\66\ and 
Rules 17Ad-22(e)(4) and (e)(18) thereunder,\67\ for the reasons 
described below.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78s(b)(2)(C).
    \66\ 15 U.S.C. 78q-1(b)(3)(F) and (b)(3)(I).
    \67\ 17 CFR 240.17Ad-22(e)(4) and (e)(18).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, 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 
protect investors and the public interest; and are not designed to 
permit unfair discrimination in the admission of participants or among 
participants in the use of the clearing agency.\68\ Based on its review 
of the record, the Commission finds that the proposal is consistent 
with Section 17A(b)(3)(F) of the Act.\69\
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78q-1(b)(3)(F).
    \69\ One commenter argues, in part, that the proposal to 
increase NSCC's membership capital requirements violates the 
requirement under Section 17A(b)(3)(F) of the Act to remove 
impediments to and perfect the mechanism of a national system for 
the prompt and accurate clearance and settlement of securities 
transactions. See Comment from Robert McBey, Chief Executive 
Officer, Wilson-Davis Co., Inc. (February 3, 2022) (``Wilson 
Letter''), supra note 8, at 6-7. See also 15 U.S.C. 78q-1(b)(3)(F). 
NSCC is not changing the process in which it clears and settles 
securities transactions submitted by its members, and, therefore, 
these requirements are not affected by this Proposed Rule Change.

---------------------------------------------------------------------------

[[Page 53801]]

i. Prompt and Accurate Clearance and Settlement and Safeguarding of 
Securities and Funds
    The Commission believes that the proposal is designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions, and assure the safeguarding of securities and funds which 
are in the custody or control of NSCC. The Commission believes that 
membership standards at covered clearing agencies should seek to limit 
the potential for member defaults and, as a result, losses to non-
defaulting members in the event of a member default. As the Commission 
stated when adopting the Covered Clearing Agency Standards, using risk-
based criteria helps to protect investors by limiting the participants 
of a covered clearing agency to those for which the covered clearing 
agency has assessed the likelihood of default.\70\ More specifically, 
the Commission believes that membership standards related to minimum 
capital requirements serve as one tool in limiting this default risk by 
ensuring that members have sufficient capital to meet its obligations 
and to absorb losses.
---------------------------------------------------------------------------

    \70\ See Securities Exchange Act Release No. 78961 (September 
28, 2016), 81 FR 70786, 70839 (October 13, 2016) (S7-03-14) 
(``Covered Clearing Agency Standards'').
---------------------------------------------------------------------------

    Covered clearing agencies employ membership standards as the first 
line of defense in their risk management, ensuring that its members, 
among other things, hold sufficient financial resources to meet the 
obligations that they may incur as a member of the covered clearing 
agency. These requirements are separate from the collection of margin, 
which addresses the risk of the cleared transactions. Instead, capital 
requirements seek to ensure that NSCC has sufficiently addressed the 
member's counterparty credit risk, that is, that the member has 
sufficient financial resources both to meet its margin requirements or 
potential loss allocation in the event of a member default; these 
requirements are not a substitute for margin.
    The Commission believes that NSCC's proposal to increase its 
minimum capital requirements for its members, as described above in 
Section II.A, is designed to strengthen its risk management practices. 
For example, NSCC proposes to increase the minimum capital requirements 
for U.S. broker dealer members based on the member's VaR Tier. The 
Commission believes that members with a higher VaR as compared to their 
excess net capital may pose more credit risk to NSCC, and therefore 
that the revised minimum capital requirements are appropriate to 
address this risk. Specifically, the Commission reviewed and analyzed 
confidential impact data NSCC provided to the Commission as part of the 
Proposed Rule Change regarding the VaR/ENC ratio, including the impact 
that the proposed minimum capital requirements would have on that 
ratio.\71\ The Commission agrees with NSCC's analysis of that data that 
these minimum requirements result in VaR/ENC ratios that are more 
consistent across NSCC's membership, meaning that the risk posed to 
NSCC by members would decrease, and based, in part, on that analysis, 
and taking into account the other factors discussed further below, the 
Commission believes that the proposed minimum capital requirements are 
a reasonable method of addressing NSCC's need to manage the risks posed 
by its members,\72\ as a balance between strengthened capital 
requirements and the impact on NSCC's members, which, as discussed 
further below, is limited to a very small subset of the members.\73\ 
For most other members, the changes would increase the minimum capital 
requirements and ensure that members, such as U.S. and foreign bank 
members, would continue to hold sufficient financial resources 
consistent with those requirements and their applicable regulatory 
obligations, although they would not actually increase the amounts held 
as the members generally meet the new requirements already based on 
their current capital.
---------------------------------------------------------------------------

    \71\ See supra note 21 for a detailed description of the 
confidential impact study.
    \72\ See supra notes 19-21.
    \73\ See supra note 83.
---------------------------------------------------------------------------

    The Commission also considered other factors as support for its 
determination that these proposed minimum capital requirements are 
reasonable. The Commission understands that NSCC has not revised these 
requirements in over 20 years. During that time, the Commission 
recognizes that there have been significant changes to the financial 
markets, such as new risks arising from cyber threats and online 
trading technologies, and heightened operational risk due to a more 
sophisticated and complex business environment. In addition, the 
Commission understands that NSCC considered several factors, including 
inflation and the capital requirements of other financial market 
infrastructures, and the Commission agrees that these factors support 
the reasonableness of the proposed minimum capital requirements.\74\ 
For example, the value of the current $500,000 minimum capital standard 
at the point in time when established twenty years ago is far less 
today in inflation-adjusted terms.\75\ Further, the Commission believes 
that the consistency between the proposed requirements and those of 
other financial market infrastructures tends to indicate that such 
requirements should address the obligations attendant to participating 
in a financial market infrastructure like NSCC, i.e., that they are 
tailored to ensure that a member can meet its requirements to NSCC in 
the event of, for example, a loss allocation or an intraday margin 
call. Finally, based on its supervisory experience, the Commission 
understands that trading volume, in terms of both number of 
transactions and notional value, have increased significantly across 
the NSCC membership during that time period.\76\ The Commission 
believes that this significant increase in trading volumes represents 
additional risk for NSCC and supports the need for the proposed minimum 
capital requirements. Taken together, the Commission believes that 
these factors support its determination regarding the reasonableness of 
the proposed minimum capital requirements, as they would allow NSCC to 
ensure that its members have capital sufficient to address the risks 
posed by their activities in addition to the margin for particular 
transactions.
---------------------------------------------------------------------------

    \74\ See Notice, supra note 3, at 74186, (citing, e.g., The 
Options Clearing Corporation, OCC Rules, Rule 301(a), available at 
https://www.theocc.com/Company-Information/Documents-and-Archives/ByLaws-and-Rules (requiring broker-dealers to have initial net 
capital of not less than $2,500,000); Chicago Mercantile Exchange 
Inc., CME Rulebook, Rule 970.A.1, available at https://www.cmegroup.com/rulebook/CME/I/9/9.pdf (requiring clearing members 
to maintain capital of at least $5 million, with banks required to 
maintain minimum tier 1 capital of at least $5 billion).
    \75\ See, e.g., https://data.bls.gov/cgi-bin/cpicalc.pl.
    \76\ See, e.g., DTCC Annual Reports, available at https://www.dtcc.com/about/annual-report, and CPMI-IOSCO Quantitative 
Disclosures for NSCC, section 23.1 (setting forth daily average 
volumes by asset class and average notional value), available at 
https://www.dtcc.com/legal/policy-and-compliance.
---------------------------------------------------------------------------

    Through these changes, NSCC should be able to ensure members have 
sufficient capital to meet their obligations and to absorb losses, 
which could further limit the potential for a member default. In turn, 
limiting the potential for a member default should promote the prompt 
and accurate

[[Page 53802]]

clearance and settlement of securities transactions.
    In addition, NSCC's proposed minimum capital requirements would 
thereby further limit potential losses to non-defaulting members in the 
event of a member default,\77\ which helps assure the safeguarding of 
securities and funds which are in the custody or control of NSCC.
---------------------------------------------------------------------------

    \77\ Under NSCC's rules, when a member defaults, NSCC may 
allocate losses to non-defaulting losses in the event that the 
defaulting member's own margin and other resources at NSCC, as well 
as NSCC's corporate contribution, are not sufficient to cover the 
loss. See section 4 of Rule 4 of NSCC's Rules, supra note 7. If 
members hold capital sufficient to allow them to meet their 
obligations to NSCC, such losses are less likely to occur.
---------------------------------------------------------------------------

    Additionally, the Commission believes NSCC's proposal to streamline 
its credit risk monitoring systems into one Watch List, as described 
above in Section II.B., would eliminate existing confusion and should 
enhance NSCC's efficiency in monitoring its members' credit risk by 
focusing on only those members that present heightened credit risk. 
Similarly, the Commission believes NSCC's proposal to make clarifying 
and transparency changes, as described above in Section II.C., would 
remove ambiguity and ensure NSCC's Rules are clear and accurate, which 
would help ensure NSCC's members understand its obligations to NSCC and 
NSCC's clearance and settlement activities. Therefore, the Commission 
believes these changes should promote the prompt and accurate clearance 
and settlement of securities transactions.
ii. Protection of Investors and the Public Interest
    The Commission believes that NSCC's proposal to increase the 
capital requirements applicable to its members would protect investors 
and the public interest. As discussed above in Section III.A.1, the 
Commission believes the proposal is designed to strengthen NSCC's risk 
management practices. Because a defaulting member could place stresses 
on NSCC with respect to NSCC's ability to meet its clearance and 
settlement obligations upon which the broader financial system relies, 
it is important that NSCC has strong membership requirements to ensure 
that its members are able to meet their obligations. By reducing the 
risk of a member default and any subsequent allocation of losses, the 
proposal should help to protect investors and the public interest by 
helping to ensure that investors' securities transactions are cleared 
and settled promptly and accurately and to assure the safeguarding of 
securities and funds which are in NSCC's custody or control.
    One commenter argues that the Proposed Rule Change contravenes the 
protection of investors and the public interest because smaller firms 
may be unable to meet these membership requirements, thereby harming 
the ability of investors and small businesses that access the markets 
through these smaller firms.\78\ The Commission disagrees. First, the 
Commission believes that the improved risk management at NSCC is 
consistent with protecting investors and the public interest. Second, 
the Commission disagrees that the potential inability of a very small 
subset of NSCC's membership to meet the proposed membership 
requirements would necessarily mean that investors and small businesses 
would not be able to access the markets and raise capital, through 
other brokers or market participants. Most smaller broker-dealer 
members of NSCC would, in fact, meet the proposed membership 
requirements, as well as other broker-dealers that serve small 
investors.
---------------------------------------------------------------------------

    \78\ See Wilson Letter, supra note 8, at 7-8 (stating that 
``[i]f the only firms that service retail investors and main street 
businesses are unable to meet NSCC's ever escalating capital 
requirements, investors holding microcap stock will be unable to 
liquidate their investments, and small businesses will be unable to 
raise money, contribute to the U.S. economy, and provide jobs to 
fellow Americans.'').
---------------------------------------------------------------------------

iii. Prohibit Unfair Discrimination
    Three commenters argue that the Proposed Rule Change related to 
increasing the minimum Excess Net Capital requirements for U.S. broker-
dealer members is designed to unfairly discriminate against smaller 
broker-dealers.\79\ These commenters generally state that the proposal 
disproportionately impacts smaller broker-dealers and, therefore, is 
intended to deny these smaller broker-dealers' membership at NSCC.\80\ 
The Commission disagrees with this view.
---------------------------------------------------------------------------

    \79\ See id. at 8-9; Comment from Aaron D. Lebenta, Parsons 
Behle Leibrock, P.C., Counsel for Alpine Securities Corporation 
(January 19, 2022) (``Alpine Letter''), supra note 8, at 1-2 and 5-
6; and Comment from Patrick Zakhary, Esq., Seyfnia and Zakhary, P.C. 
(February 7, 2022) (``Zakhary Letter''), supra note 8, at 1.
    \80\ See id.
---------------------------------------------------------------------------

    First, NSCC's proposal to increase its minimum capital requirements 
would apply to all members and is not limited to small U.S. broker-
dealers.\81\ The impact of the proposal on U.S. broker-dealers is 
determined by the risks that the member presents to NSCC through the 
type of clearing activity and the transactions cleared, rather than the 
member's size. The Commission understands, based on its review and 
analysis of the record,\82\ that, out of NSCC's 146 members (including 
bank members, broker-dealer members, etc.), only a few U.S. broker-
dealer members would likely be impacted by the proposal (i.e., would 
need to raise additional capital to meet NSCC's proposed increased 
capital requirements).\83\ The vast majority of NSCC's members, 
including some small U.S. broker-dealers, already meet NSCC's proposed 
minimum capital requirements. Therefore, the Commission does not 
believe that NSCC's proposal is intended to exclude smaller broker-
dealers from its membership.
---------------------------------------------------------------------------

    \81\ The proposed increases would be between 2 and 10 times 
NSCC's current minimum Excess Net Capital requirements, across all 
U.S. broker-dealer members. Moreover, the increase is not limited to 
U.S. broker-dealer members; for example, NSCC also proposes 
increasing its minimum capital requirement for members that are U.S. 
banks to 10 times the current requirement.
    \82\ Specifically, the Commission reviewed and analyzed 
confidential impact data NSCC provided to the Commission as part of 
the Proposed Rule Change. See supra notes 19-21.
    \83\ NSCC has 146 members, which consists of 14 bank members and 
132 other members, the vast majority of which are broker dealer 
members. 144 members are based in the United States, while two 
members are non-U.S. based. See The Depository Trust and Clearing 
Corporation, CPMI IOSCO Quantitative Disclosure Results 2022 Q1 
(``Q1 Quantitative Disclosures'') (June 6, 2022), available at 
https://www.dtcc.com/legal/policy-and-compliance.
---------------------------------------------------------------------------

    Second, the Commission believes that, based on its analysis of the 
data,\84\ on average broker-dealers with lower Excess Net Capital 
amounts present higher risk exposures to NSCC relative to their capital 
levels. The Commission further believes the proposal would more closely 
align the excess net capital requirements for these broker-dealers 
members to the broker-dealer members that are required to hold excess 
net capital above the minimum required, which, as discussed above, 
means that such broker-dealers would pose less risk to NSCC.\85\
---------------------------------------------------------------------------

    \84\ See supra notes 19-21. See also, supra text accompanying 
note 71.
    \85\ Based on its review of the confidential impact study data, 
the Commission notes that, if the proposed VaR tiers had been 
applied to that analysis, then the average VaR/ENC ratio declines to 
7 percent for members with excess net capital less than $5 million, 
and 9 percent for members with excess net capital of $5-10 million, 
which aligns more closely to the class of members with greater 
excess net capital. See also NSCC Response Letter, supra note 19, at 
3.
---------------------------------------------------------------------------

    By implementing a tiered approach, as described above in Section 
II.A.1., the Commission believes NSCC's proposal is designed to 
increase the minimum Excess Net Capital requirements for its U.S. 
broker-dealer members in relation to the level of risks those members 
present to NSCC. The tiered approach should facilitate the continued 
access by

[[Page 53803]]

less capitalized firms, while protecting NSCC and its members from 
losses arising from a member default. Furthermore, by placing newly 
admitted members in the middle-tier, the proposal should facilitate 
entry into NSCC membership by less capitalized firms, while allowing 
NSCC to manage the risk of those members' trading activity which has 
not yet been established, which will help protect NSCC and its members 
from the risks of those members defaulting. Therefore, the Commission 
concludes the proposal does not disproportionately impact smaller 
broker-dealers.
    For the reasons discussed in this Sections III.A., the Commission 
believes that the Proposed Rule Change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\86\
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Section 17A(b)(3)(I) of the Act

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency do not impose any burden on competition not necessary 
or appropriate in furtherance of the Act.\87\ This provision does not 
require the Commission to find that a proposed rule change represents 
the least anticompetitive means of achieving the goal.\88\ Rather, it 
requires the Commission to balance the competitive considerations 
against other relevant policy goals of the Act.\89\
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78q-1(b)(3)(I).
    \88\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105 
(D.C. Cir. 1978).
    \89\ See id.
---------------------------------------------------------------------------

    The Commission acknowledges the proposal could pose a burden on 
competition for those broker-dealer members who would be required to 
raise additional capital to meet the proposed increases in minimum 
Excess Net Capital requirements. However, the Commission believes that 
this burden is appropriate. As discussed further below in Section 
III.D, NSCC is required to have policies and procedures reasonably 
designed to ensure that it has risk-based, objective, and publicly 
disclosed criteria for participation. The proposed capital requirements 
meet this standard.
    Several commenters argue that this burden on competition is not 
necessary or appropriate in furtherance of the Act for two reasons.\90\ 
First, commenters argue that NSCC has not provided sufficient evidence 
that the proposed increases are necessary or appropriate.\91\ Second, 
commenters argue that NSCC's proposed tiered approach is redundant and 
therefore unnecessary and inappropriate.\92\ The Commission is not 
persuaded by these arguments.
---------------------------------------------------------------------------

    \90\ See Alpine Letter, supra note 8, at 3-8; Comment from 
Kimberly Unger, Chief Executive Officer and Managing Director, STANY 
The Security Traders Association of New York, Inc. (January 27, 
2022) (``STANY Letter''), supra note 8, at 2-3; Wilson Letter, supra 
note 8, at 8; Letter from Scott G. Monson, Attorney (February 10, 
2022) (``Monson Letter''), supra note 8, at 2. In addition, one 
commenter stated that the proposal is anti-competitive in nature 
because newly admitted broker-dealers will be placed in the middle 
VaR Tier. See STANY Letter, supra note 8, at 5. The Commission 
believes that such proposal is reasonable because a newly admitted 
member would not have a historical VaR record, which NSCC needs to 
assign an appropriate VaR Tier.
    \91\ See Alpine Letter, id. at 7-8; STANY Letter, id. at 4-5; 
Wilson Letter, id. at 4; Monson Letter, id. at 2-3; and Zakhary 
Letter, supra note 8, at 1-3.
    \92\ See id.
---------------------------------------------------------------------------

    First, as discussed above in Section III.A.iii., the Commission 
believes that the proposed capital requirements should help ensure that 
NSCC provides prompt and accurate clearance and settlement. The record 
shows that on average broker-dealer members with lower Excess Net 
Capital amounts present higher risk exposures to NSCC relative to their 
capital levels.\93\ Second, the Commission believes that the risk being 
addressed by capital requirements, and membership requirements more 
broadly, is separate from the risks that are addressed through the 
collection of margin on the particular transactions cleared and settled 
at NSCC. The Commission believes capital requirements are used to help 
manage counterparty credit risk and, in part, measure a member's 
ability to meet its future obligations that could help prevent the 
member's default.\94\ Collateral requirements (i.e., margin), on the 
other hand, are used to help mitigate losses to NSCC and non-defaulting 
members resulting from NSCC's closeout of a defaulting member's 
positions, which is measured by NSCC's market risk exposure to that 
member's open trading portfolio.\95\ Consequently, the proposal would 
not be duplicating NSCC's existing risk management practices related to 
its margin calculations.
---------------------------------------------------------------------------

    \93\ See supra notes 19-21 and accompanying text.
    \94\ See Covered Clearing Agency Standards, supra note 68, at 
70859.
    \95\ See id. at 70855.
---------------------------------------------------------------------------

    On balancing the proposal's competitive considerations, the 
Commission believes that only a few broker-dealer members will be 
impacted by the proposal.\96\ Therefore, the Commission believes that 
the proposal will help strengthen NSCC's credit risk management 
practices by increasing the minimum Excess Net Capital requirements for 
broker-dealer members tied to the level of risk these members present 
to NSCC, which is both necessary and appropriate in furtherance of the 
Act.
---------------------------------------------------------------------------

    \96\ See supra text accompanying notes 78-79.
---------------------------------------------------------------------------

    Furthermore, to give impacted members time to prepare, NSCC 
proposes to provide its members a one year implementation period to 
monitor their risk levels and to comply with the increased capital 
requirements. In addition, the Commission understands that, in setting 
the proposed amounts, NSCC considered several benchmarking factors, 
including inflation, the proposal's historical development indicating 
member appetite for different methods in setting the minimums, and the 
capital requirements of other financial market infrastructures, which 
provided indicators for setting appropriate increases to its minimum 
capital requirements.\97\ As discussed above in Section III.A.i, the 
Commission agrees that these factors support the reasonableness of the 
proposed minimum capital requirements. Based on the totality of the 
factors, the Commission concludes that the Proposed Rule Change does 
not impose any burden on competition not necessary or appropriate in 
furtherance of the Act.
---------------------------------------------------------------------------

    \97\ See Notice of Filing, supra note 3, at 74186.
---------------------------------------------------------------------------

    For the reasons stated above, notwithstanding the potential impact 
on a small number of broker-dealers, the Commission believes that, in 
light of the potential benefits to investors arising from the Proposed 
Rule Change and the resulting overall improved counterparty credit risk 
management at NSCC (i.e., the prompt and accurate clearance and 
settlement of securities transactions, the safeguarding of securities 
and funds, and the protection of investors and the public interest as 
discussed in section III.A.1.iii above), the Proposed Rule Change is 
consistent with the requirements of Section 17A(b)(3)(I) of the Act.

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

    Rule 17Ad-22(e)(4)(i) under the Act requires that a covered 
clearing agency 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.\98\
---------------------------------------------------------------------------

    \98\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Increasing membership capital requirements, as described above in 
Section II.A., would help ensure that

[[Page 53804]]

members maintain sufficient capital to meet their obligations to NSCC, 
including potential future obligations required to fund its trading 
activity with NSCC or to absorb losses allocated to it. By ensuring 
members' ability to meet their financial obligations to NSCC, the 
proposal, in turn, will help ensure NSCC continues to maintain 
sufficient financial resources to cover its credit exposure to each 
participant fully with a high degree of confidence.\99\
---------------------------------------------------------------------------

    \99\ Four commenters argue that, rather than manage its credit 
exposure, NSCC should reduce the risk by shortening the settlement 
cycle. See Alpine Letter, supra note 8, at 8-9; STANY Letter, supra 
note 8, at 5; Wilson Letter, supra note 8, at 4-6; Zakhary Letter, 
supra note 8, at 2. However, NSCC manages credit risk under the 
current standard settlement cycle, and the Commission disagrees that 
it would be feasible for NSCC to unilaterally change the industry 
standard settlement cycle.
---------------------------------------------------------------------------

    Certain commenters argue that NSCC fails to establish evidence that 
there exists an actual credit exposure to NSCC that the proposed 
increased Excess Net Capital requirements would cover that is not 
already covered by NSCC's margin requirements.\100\ NSCC responds to 
these commenters by stating that as a matter of law and regulation, 
NSCC is required to manage many different risks, including legal, 
credit, liquidity, operational, general business, investment, and 
custody, regardless of whether any of the risks materialize into an 
actual issue.\101\ While members may not routinely experience issues 
related to legal, operational, or cyber risks, these issues can arise, 
possibly without advance warning, and, as such, they are considered a 
critical part of the ongoing credit risks that members present to NSCC 
and that NSCC must manage.\102\
---------------------------------------------------------------------------

    \100\ See Wilson Letter, supra note 8, at 3; Monson Letter, 
supra note 8, at 3.
    \101\ NSCC Response Letter, supra note 19, at 2.
    \102\ See id.
---------------------------------------------------------------------------

    In considering these comments, the Commission thoroughly reviewed 
and considered the Proposed Rule Change, including the supporting 
exhibits that provided confidential analysis on the impact and 
rationale for the proposed capital requirements. Based on its review of 
these materials, the Commission believes that the proposal would, in 
fact, better enable NSCC to cover its credit exposure to Members and 
meet the applicable Commission regulatory requirements. Specifically, 
the Commission has considered the relationship between members' VaR and 
their excess net capital, which indicates that on average broker-
dealers with lower Excess Net Capital amounts present higher risk 
exposures to NSCC relative to their capital levels, and that, upon 
application of the proposed requirements, the risk to NSCC decreases 
and is more consistent across NSCC's members, as evidenced by the more 
consistent VaR/ENC levels across NSCC's members under the proposed 
minimum requirements, while balancing the increased exposure and the 
impact on members.\103\ Therefore, the Commission believes that the 
proposal would provide NSCC with stronger risk management with respect 
to the higher risk exposure and establish risk-based criteria for 
participation.
---------------------------------------------------------------------------

    \103\ See supra notes 19-21. See also supra text accompanying 
notes 71-73.
---------------------------------------------------------------------------

    Additionally, the proposal to revise the Watch List, as described 
above in Section II.B, could help NSCC better allocate its resources 
for monitoring its credit exposures to members, which, in turn, could 
help NSCC more effectively manage and mitigate its credit exposures to 
its members. Therefore, the Commission believes the Proposed Rule 
Change is consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.

D. Consistency With Rule 17Ad-22(e)(18)

    Rule 17Ad-22(e)(18) under the Act requires that a covered clearing 
agency establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation, which permit fair and 
open access by direct and, where relevant, indirect participants and 
other financial market utilities, require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency, and 
monitor compliance with such participation requirements on an ongoing 
basis.\104\
---------------------------------------------------------------------------

    \104\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    As described above in Section II.A., the proposal will increase 
NSCC's minimum capital requirements for its members. As it relates to 
U.S. broker-dealer members, the amount of the proposed increase to 
Excess Net Capital requirements will be based on a tiered approach 
designed to reflect the level of risk the member presents to NSCC. For 
non-U.S. broker-dealer members, the proposal will impose a flat equity 
capital requirement.
    Similarly, the proposal will establish membership categories for 
national securities exchanges and Index Receipt Agents, for purposes of 
NSCC's minimum capital requirements, and will impose capital 
requirements based on the analysis of the risk profiles of these 
entities and their importance to the functioning of the securities 
markets. By establishing these new categories, NSCC will replace 
conditional and discretionary minimum capital requirements with 
objective minimum capital requirements commensurate with the risks 
these members pose to NSCC.
    For both U.S. and non-U.S. bank and trust company members and 
limited members, the proposal will revise how net capital is defined to 
incorporate a measurement used by banking regulators, and impose 
additional financial requirements on non-U.S. bank and trust company 
members tied to home country regulatory requirements and international 
standards. The proposal will also establish a category for all other 
members, which will impose minimum financial requirements tied to that 
entity's regulatory requirements, which NSCC may increase based on how 
closely it resembles another membership type and its risk-profile.
    First, the proposal to increase minimum capital requirements to 
NSCC's members will help to ensure each member has and maintains 
sufficient financial resources to meet obligations arising from its 
participation in NSCC. Second, the proposal will further establish 
objective, risk-based, and publicly disclosed criteria for setting the 
amounts of NSCC's increased capital requirements for its members. The 
proposed changes will apply to all NSCC members as set forth in NSCC's 
public-facing Rules.\105\ For U.S. broker-dealer members, the tiered 
approach sets capital requirements to the level of risk the member 
presents to NSCC and is therefore designed to establish objective and 
risk-based criteria for U.S. broker-dealers to participate in NSCC.
---------------------------------------------------------------------------

    \105\ The Commission also understands that NSCC considered 
several additional factors, including inflation, historical 
development of the proposal, and the capital requirements of other 
financial market infrastructures. See Notice of Filing, supra note 
3, at 74186; and supra note 12. The Commission believes that these 
factors demonstrate the reasonableness of the proposed minimum 
capital requirements, as discussed above in Section III.A.i.
---------------------------------------------------------------------------

    Certain commenters argue, in various ways, that the proposal's 
rationale for the increased capital requirements are vague, arbitrary, 
and specious.\106\ The

[[Page 53805]]

Commission disagrees. As discussed above, on average broker-dealer 
members with lower Excess Net Capital amounts present higher risk 
exposures to NSCC relative to their capital levels.\107\ Additionally, 
the Commission understands that NSCC considered several additional 
risks faced by its members, both qualitative and quantitative, in 
determining its proposed capital requirements, which the Commission 
believes demonstrate the reasonableness of the proposed minimum capital 
requirements, as discussed above in Section III.A.i.\108\ Regarding 
U.S. and non-U.S. banks and trust companies, the proposal will set the 
minimum capital requirements based on standards and measures used by 
banking regulators. Regarding non-U.S. broker-dealers and for all other 
types of members, the proposal would eliminate conditional and 
discretionary minimum capital requirements in favor of establishing 
objective minimum capital requirements. Therefore, the Commission 
concludes the proposal is reasonably designed to establish objective, 
risk-based, and publicly disclosed criteria for participation.
---------------------------------------------------------------------------

    \106\ See Alpine Letter, supra note 8, at 1-2 and 5-6; Wilson 
Letter, supra note 8, at 8-9; Zakhary Letter, supra note 8, at 1. 
Certain commenters argue members that self-clear present more risk 
to NSCC than members who clear on behalf of others. See STANY 
Letter, supra note 8, at 3; Letter from Charles F Lek, Chief 
Executive Officer, Lek Securities Corporation (January 19, 2022) 
(``Lek Letter''), supra note 8, at 1-2; Comment from Wendie Wachtel, 
Chief Operating Officer, Wachtel and Co., Inc. (March 22, 2022) 
(``Wachtel Letter''), supra note 8, at 2. However, the argument is 
not relevant to the proposal because it is based on an inaccurate 
assertion that self-clearing includes proprietary trading firms 
only, while clears on behalf of others refers to agency firms only. 
Rather, both types of members could be engaged in both proprietary 
and customer trading.
    \107\ See supra note 54 and accompanying text.
    \108\ See supra note 72. See also Notice of Filing, supra note 
3, at 74196; and NSCC Response Letter, supra note 19, at 2 (noting 
that while members may not routinely experience issues related to 
legal, operational, or cyber risks, these issues can arise, possibly 
without advance warning, and, as such, they are considered a 
critical part of the ongoing credit risks that members present to 
NSCC and that NSCC must manage).
---------------------------------------------------------------------------

    For the reasons described above, the Commission finds that the 
Proposed Rule Change is consistent with Rule 17Ad-22(e)(18) under the 
Act.\109\
---------------------------------------------------------------------------

    \109\ Id.
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \110\ and 
the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \110\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\111\ that proposed rule change SR-NSCC-2021-016, be, and hereby is, 
approved.\112\
---------------------------------------------------------------------------

    \111\ 15 U.S.C. 78s(b)(2).
    \112\ In approving the Proposed Rule Change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\113\
---------------------------------------------------------------------------

    \113\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-18861 Filed 8-31-22; 8:45 am]
BILLING CODE 8011-01-P