[Federal Register Volume 87, Number 202 (Thursday, October 20, 2022)]
[Notices]
[Pages 63845-63847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22732]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96088; File No. SR-NSCC-2022-009]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Adopt Intraday 
Volatility Charge and Eliminate Intraday Backtesting Charge

October 14, 2022.

I. Introduction

    On July 7, 2022, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2022-009 (the ``Proposed 
Rule Change'') pursuant to FR 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 July 20, 
2022,\3\ and the Commission has received comments regarding the changes 
proposed in the Proposed Rule Change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 95286 (July 14, 2022), 
87 FR 43355 (July 20, 2022) (File No. SR-NSCC-2022-009) 
(``Notice'').
    \4\ Comments are available at https://www.sec.gov/comments/sr-nscc-2022-009/srnscc2022009.htm.
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    On September 1, 2022, pursuant to FR 19(b)(2) of the Act,\5\ 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.\6\ This order institutes 
proceedings, pursuant to FR 19(b)(2)(B) of the Act,\7\ to determine 
whether to approve or disapprove the Proposed Rule Change.
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 95650 (Sept. 1, 2022), 
87 FR 55054 (Sept. 8, 2022) (SR-NSCC-2022-009).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

    A key tool that NSCC uses to manage its respective credit exposures 
to its members is the daily collection of margin from each member, 
which is referred to as each member's Required Fund Deposit.\8\ The 
aggregated amount of all members' margin constitutes the Clearing Fund, 
which NSCC would access should a member default and the defaulted 
member's own margin be insufficient to satisfy losses to NSCC caused by 
the liquidation of that member's portfolio.
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    \8\ The description of the Proposed Rule Change is based on the 
statements prepared by NSCC in the Notice. See Notice, supra note 3. 
Capitalized terms used herein and not otherwise defined herein are 
defined in the Rules, available at https://www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
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A. Intraday Volatility Charge

    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 \9\ 
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

[[Page 63846]]

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.\10\ The VaR Charge usually comprises the largest portion of 
a Member's Required Fund Deposit.
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    \9\ 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.
    \10\ Procedure XV, FRs I(A)(1)(a)(i) and (2)(a)(i) of the Rules, 
supra note 8.
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    In the Proposed Rule Change, NSCC is proposing to implement an 
intraday volatility charge, which it may collect on an intraday basis, 
to better address the volatility risks presented by Members' adjusted 
intraday Net Unsettled Positions between start of day collections of 
Required Fund Deposits. 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. The amount of the 
intraday volatility charge would be reduced by the amount collected 
from that Member at the start of that Business Day as the volatility 
portion of the Margin Requirement Differential charge, as discussed in 
more detail in the Notice.
    NSCC is also proposing that it would not collect an intraday 
volatility charge when the quantitative thresholds are met, if (a) 
trades submitted later in the day would offset trades submitted earlier 
in the day, such that the quantitative 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. 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.
    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. 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.

B. Intraday Backtesting Charge

    The Backtesting Charge is 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. 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 in calculating any applicable 
Backtesting Charge.\11\
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    \11\ Procedure XV, FRs I(B)(3) of the Rules, supra note 8.
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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. 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.
    In the Proposed Rule Change, NSCC is proposing to eliminate the 
Intraday Backtesting Charge for several reasons, as set forth in more 
detail in the Notice. 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 
undercount potential backtesting deficiencies. 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. 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 indicate that this proposal would not have a significant impact 
on NSCC's ability to maintain its backtesting coverage target.

III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to FR 
19(b)(2)(B) of the Act \12\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
providing the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \12\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to FR 19(b)(2)(B) of the Act,\13\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Change's consistency with FR 17A of the Act,\14\ and the rules 
thereunder, including the following provisions:
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    \13\ Id.
    \14\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\15\ which requires, among 
other things, that the rules of a clearing agency must be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible, and to protect investors and the public interest; and
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(4)(i) of the Act,\16\ which requires that 
a covered clearing agency establish, implement, maintain,

[[Page 63847]]

and enforce written policies and procedures reasonably designed to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence.
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    \16\ 17 CFR 240.17Ad-22(e)(4)(i).
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     Rule 17Ad-22(e)(6)(i) of the Act,\17\ which requires that 
a covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to cover, if the 
covered clearing agency provides central counterparty services, its 
credit exposures to its participants by establishing a risk-based 
margin system that, at a minimum, considers, and produces margin levels 
commensurate with, the risks and particular attributes of each relevant 
product, portfolio, and market.
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    \17\ 17 CFR 240.17Ad-22(e)(6)(i).
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     Rule 17Ad-22(e)(23)(ii) of the Act \18\ which requires 
that a covered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to provide 
sufficient information to enable participants to identify and evaluate 
the risks, fees, and other material costs they incur by participating 
in the covered clearing agency.
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    \18\ 17 CFR 240.17Ad-22(e)(23)(ii).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with FR 17A(b)(3)(F) of the Act,\19\ and 
Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii) of the Act,\20\ or 
any other provision of the Act, or the rules and regulations 
thereunder.
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
    \20\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by November 10, 2022. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 25, 2022.
    The Commission asks that commenters address the sufficiency of 
NSCC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice,\21\ in addition to any other comments they may 
wish to submit about the Proposed Rule Change.
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    \21\ See Notice, supra note 3.
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    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-2022-005 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

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 November 10, 2022. Rebuttal comments should be submitted by 
November 25, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(31).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-22732 Filed 10-19-22; 8:45 am]
BILLING CODE 8011-01-P