[Federal Register Volume 87, Number 244 (Wednesday, December 21, 2022)]
[Notices]
[Pages 78157-78166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27657]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96511; File No. SR-NSCC-2022-015]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing a Proposed Rule Change To Make Certain 
Enhancements to the Gap Risk Measure and the VaR Charge

December 15, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 2, 2022, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the clearing 
agency.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NSCC filed this proposed rule change as an advance notice 
(SR-NSCC-2022-802) with the Commission pursuant to Section 806(e)(1) 
of Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b-
4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of the 
advance notice is available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    (a) The proposed rule change of NSCC consists of modifications to 
NSCC's Rules & Procedures (``Rules'') \4\ in order to enhance the 
calculation of the volatility component of the Clearing Fund formula 
that utilizes a parametric Value-at-Risk (``VaR'') model (``VaR 
Charge'') by (1) making the result of the gap risk measure (``Gap Risk 
Measure'') calculation an additive component of the VaR Charge when it 
is applicable, rather than being applied as the applicable VaR Charge 
when it is the largest of three separate calculations, (2) modifying 
the language relating to

[[Page 78158]]

which ETF (as defined below) positions are excluded from the Gap Risk 
Measure, (3) adjusting both the trigger for applying the Gap Risk 
Measure and the calculation of the Gap Risk Measure to be based on the 
two largest positions in a portfolio, rather than based on the single 
largest position, (4)(a) removing the description of the methodology in 
the Rules for calculating the gap risk haircut, (b) providing that, 
like the concentration threshold, gap risk haircuts would be calibrated 
from time to time based on backtesting and impact analysis and (c) 
changing the floor of the gap risk haircut from 10 percent to 5 percent 
for the largest position and adding a floor of the gap risk haircut of 
2.5 percent for the second largest position subject to the Gap Risk 
Measure and (5) making certain clarifications to the description of Gap 
Risk Measure, as described in greater detail below.
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    NSCC is proposing to enhance the calculation of the VaR Charge by 
(1) making the result of the Gap Risk Measure calculation an additive 
component of the VaR Charge when it is applicable, rather than being 
applied as the applicable VaR Charge when it is the largest of three 
separate calculations, (2) modifying the language relating to which ETF 
positions are excluded from the Gap Risk Measure, (3) adjusting both 
the trigger for applying the Gap Risk Measure and the calculation of 
the Gap Risk Measure to be based on the two largest positions in a 
portfolio, rather than based on the single largest position, (4)(a) 
removing the description of the methodology in the Rules for 
calculating the gap risk haircut, (b) providing that, like the 
concentration threshold, gap risk haircuts would be calibrated from 
time to time based on backtesting and impact analysis and (c) changing 
the floor of the gap risk haircut from 10 percent to 5 percent for the 
largest position and adding a floor of the gap risk haircut of 2.5 
percent for the second largest position subject to the Gap Risk Measure 
and (5) making certain clarifications to the description of Gap Risk 
Measure, as described in greater detail below.
    The proposed changes would enhance the flexibility of the Gap Risk 
Measure to broaden the scope of gap risk event coverage and result in 
more frequent gap risk charges. NSCC conducted an impact study for the 
period January 1, 2021 through December 31, 2021 (``Impact Study'') 
which reviewed the overall impact of the proposed changes on the VaR 
Charge amounts, the Clearing Fund amounts (at the NSCC level and Member 
level) and the effect on the Members during the Impact Study period. 
The Impact Study looked at the impacts during the Impact Study period 
as if all of the proposed changes had been made and did not look at the 
impacts of each of the proposed changes individually. The Impact Study 
indicated that the proposed changes would have resulted in a 10.66% 
increase for the daily total VaR Charge on average and would have 
resulted in a 4.04% increase in the daily total Clearing Fund on 
average during that period.
    The three Members with the largest average daily VaR Charge 
increases in dollar amount during the Impact Study period would have 
had increases of $60,113,514, $30,054,385 and $22,237,892 representing 
an average daily increase for such Members of 31.68%, 14.97% and 
28.11%, respectively. The three Members with the largest average daily 
VaR Charge increases as a percentage of production Clearing Fund paid 
by such Members during the Impact Study period would have had an 
average daily increase of 31.78%, 29.07% and 28.99%, respectively, had 
the proposed changes been in place. Approximately 14% of Members would 
have had either a decrease or an increase of less than 1% in their 
average daily VaR Charge had the proposed changes been in place.
    Prior to implementation of the proposed changes, NSCC would conduct 
Member outreach to discuss the proposed changes and the impact of the 
proposed changes on the Members. Following implementation, NSCC would 
also incorporate the proposed changes into the NSCC Risk Client Portal 
and VaR Calculator.
(i) Overview of the Required Fund Deposit and NSCC's Clearing Fund
    As part of its market risk management strategy, NSCC manages its 
credit exposure to Members by determining the appropriate Required Fund 
Deposits to the Clearing Fund and monitoring its sufficiency, as 
provided for in the Rules.\5\ The Required Fund Deposit serves as each 
Member's margin.
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    \5\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters), supra note 4. NSCC's market risk 
management strategy is designed to comply with Rule 17Ad-22(e)(4) 
under the Act, where these risks are referred to as ``credit 
risks.'' 17 CFR 240.17Ad-22(e)(4).
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    The objective of a Member's Required Fund Deposit is to mitigate 
potential losses to NSCC associated with liquidating a Member's 
portfolio in the event NSCC ceases to act for that Member (hereinafter 
referred to as a ``default'').\6\ The aggregate of all Members' 
Required Fund Deposits constitutes the Clearing Fund of NSCC. NSCC 
would access its Clearing Fund should a defaulting Member's own 
Required Fund Deposit be insufficient to satisfy losses to NSCC caused 
by the liquidation of that Member's portfolio.
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    \6\ The Rules identify when NSCC may cease to act for a Member 
and the types of actions NSCC may take. For example, NSCC may 
suspend a firm's membership with NSCC or prohibit or limit a 
Member's access to NSCC's services in the event that Member defaults 
on a financial or other obligation to NSCC. See Rule 46 
(Restrictions on Access to Services) of the Rules, supra note 4.
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    The volatility component of each Member's Required Fund Deposit is 
designed to measure market price volatility of the start of day 
portfolio and is calculated for Members' Net Unsettled Positions and 
Net Unsettled Balance Order Positions (hereinafter collectively 
referred to as ``Net Unsettled Positions'').\7\ The volatility 
component is designed to capture the market price risk \8\ 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 (``Core Parametric 
Estimation''); (2) the calculation of the Gap Risk Measure, which is 
based on the

[[Page 78159]]

concentration threshold of the largest non-index position in a 
portfolio, as described in greater detail below; and (3) a portfolio 
margin floor calculation based on the market values of the long and 
short positions in the portfolio (``Portfolio Margin Floor'').\9\ The 
VaR Charge usually comprises the largest portion of a Member's Required 
Fund Deposit.
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    \7\ Net Unsettled Positions refer to net positions that have not 
yet passed their settlement date or did not settle on their 
settlement date. See Procedure XV (Clearing Fund Formula and Other 
Matters) of the Rules, supra note 4.
    \8\ 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.
    \9\ Procedure XV, Sections I(A)(1)(a)(i) and I(A)(2)(a)(i) of 
the Rules, supra note 4.
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    Certain Net Unsettled Positions are excluded from the calculation 
of the VaR Charge pursuant to Sections I(A)(1)(a)(ii) and 
I(A)(2)(a)(ii) of Procedure XV and are instead subject to a haircut-
based calculation.\10\ The charge that is applied to a Member's 
Required Fund Deposit with respect to the volatility component is 
referred to as the volatility charge and is the sum of the applicable 
VaR Charge and the haircut-based calculation.
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    \10\ Procedure XV, Sections I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of 
the Rules, supra note 4.
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    NSCC regularly assesses the risks it may face as a central 
counterparty as such risks relate to its margining methodologies to 
evaluate whether margin levels are commensurate with the particular 
risk attributes of each relevant product, portfolio and market. In 
connection with this assessment, NSCC is proposing to enhance the Gap 
Risk Measure calculation. These proposed enhancements have been 
developed in response to regulatory feedback and in light of recent 
market events that led to a reconsideration of the idiosyncratic risks 
that the Gap Risk Measure is designed to mitigate, as described in 
greater detail below.
    The proposed changes would enhance the calculation of the VaR 
Charge by making the result of the Gap Risk Measure calculation an 
additive component of the VaR Charge, rather than being applied as the 
VaR Charge only when it is the largest of three separate calculations. 
The proposed changes would modify the language relating to which 
positions are excluded from the Gap Risk Measure. The proposed changes 
would also adjust both the trigger for applying the Gap Risk Measure 
and the calculation of the Gap Risk Measure, when applicable, to be 
based on the two largest positions in a portfolio, rather than based on 
the single largest position. The proposed changes would also adjust the 
calculation and description of the gap risk haircut and make certain 
other clarifications discussed below.
(ii) Overview of Idiosyncratic Risks and the Gap Risk Measure
    The Gap Risk Measure was designed to address the risks presented by 
a portfolio that is more susceptible to the effects of gap risk events 
due to the idiosyncratic nature of the Net Unsettled Positions in that 
portfolio (such risks may be referred to as idiosyncratic risks).\11\ 
Gap risk events have been generally understood as idiosyncratic issuer 
events (for example, earning reports, management changes, merger 
announcements, insolvency, or other unexpected, issuer-specific events) 
that cause a rapid shift in general market price volatility levels. The 
Gap Risk Measure is designed to address the risk that a gap risk event 
affects the price of a security in which a portfolio holds a Net 
Unsettled Position that represents more than a certain percent of the 
entire portfolio's value, such that the event could impact the entire 
portfolio's value. Currently, the Gap Risk Measure serves as a 
substitution to the calculation of the Core Parametric Estimation in 
case the Gap Risk Measure is greater in magnitude.
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    \11\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of 
Procedure XV of the Rules, supra note 4. See also Securities 
Exchange Act Release Nos. 82780 (February 26, 2018), 83 FR 9035 
(March 2, 2018) (SR-NSCC-2017-808); 82781 (February 26, 2018), 83 FR 
9042 (March 2, 2018) (SR-NSCC-2017-020) (``Initial Filing'').
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    The risk of large, unexpected price movements, particularly those 
caused by a gap risk event, are more likely to have a greater impact on 
portfolios with large Net Unsettled Positions in securities that are 
susceptible to those events. Generally, index-based exchange-traded 
funds (``ETFs'') that track closely to diversified indices are less 
prone to the effects of gap risk events. As such, if the concentration 
threshold is met, NSCC currently calculates the Gap Risk Measure for 
Net Unsettled Positions in the portfolio other than positions in ETFs 
that track diversified indices, as determined by NSCC from time to time 
(``non-index Net Unsettled Positions'').
    The Gap Risk Measure is only applied for a Member if the non-index 
Net Unsettled Position with the largest absolute market value in the 
portfolio represents more than a certain percent of the entire 
portfolio's value (``concentration threshold''). The concentration 
threshold was initially set at 30 percent of a Member's entire 
portfolio value.\12\ The concentration threshold can be set no higher 
than 30 percent and is evaluated periodically based on Members' 
backtesting results over a twelve month look-back period to determine 
if it may be appropriate to lower the threshold.\13\ Currently, the 
concentration threshold is set at 5%.\14\
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    \12\ See Id.
    \13\ Id.
    \14\ See Important Notice a9055, dated September 27, 2021, at 
https://www.dtcc.com/-/media/Files/pdf/2021/9/27/a9055.pdf 
(notifying Members that the concentration threshold had been changed 
from 10% to 5%).
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    When applicable, NSCC calculates the Gap Risk Measure by 
multiplying the gross market value of the largest non-index Net 
Unsettled Position in the portfolio by a percent of not less than 10 
percent (``gap risk haircut'').\15\ Currently, NSCC determines the gap 
risk haircut empirically as no less than the larger of the 1st and 99th 
percentiles of three-day returns of a set of CUSIPs that are subject to 
the VaR Charge pursuant to the Rules, giving equal rank to each to 
determine which has the highest movement over that three-day period. 
NSCC uses a look-back period of not less than ten years that includes a 
one-year stress period. If the one-year stress period overlaps with the 
look-back period, only the non-overlapping period would be combined 
with the look-back period. The result is then rounded up to the nearest 
whole percentage.
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    \15\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of 
Procedure XV, supra note 4.
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    NSCC is proposing changes to the calculation of the Gap Risk 
Measure that are designed to allow NSCC to apply this charge based on 
more than one position and more frequently. Recent extreme market 
events, including both the impacts of the COVID-19 pandemic and 
volatility caused by social media sentiments (referred to as the ``meme 
stock events''), have led NSCC to reconsider the causes and 
characteristics of idiosyncratic risks that the Gap Risk Measure was 
designed to mitigate. More specifically, these events have indicated 
that price changes due to gap risk events seem to occur more frequently 
and in higher severity; and may not be isolated to issuer events but 
driven by new mechanisms that drive concurrent market price moves 
involving unconventionally correlated securities. The Gap Risk Measure 
provides an insurance against various permutations of idiosyncratic 
risk moves, however, it is not targeted to capture and cover all such 
instances, especially when they are extreme, including certain meme 
stock events. NSCC believes the proposed enhancements to the Gap Risk 
Measure calculation, described below, would improve its ability to 
measure and mitigate against these idiosyncratic risks.

[[Page 78160]]

(iii) Proposed Changes To Enhance the Gap Risk Measure and Enhance 
Transparency
    With a goal of enhancing the Gap Risk Measure to broaden the scope 
of gap risk event coverage, NSCC explored a number of alternatives in 
particular by (1) using the Gap Risk Measure as an additive component 
rather than a substitutive component of the VaR Charge and (2) applying 
the Gap Risk Measure to one or more positions in a portfolio. NSCC also 
conducted impact studies based on various permutations of the 
parameters and NSCC is proposing enhancements to the Gap Risk Measure 
that would improve NSCC's ability to mitigate against idiosyncratic 
risks as described below. NSCC is also proposing enhancements to the 
transparency of the Rules by making certain clarifications to the 
description of the Gap Risk Measure.
    NSCC is proposing to make the following enhancements to the Gap 
Risk Measure: (1) make the Gap Risk Measure an additive component of 
the Member's total VaR Charge when it is applicable, rather than being 
applied as the applicable VaR Charge when it is the largest of three 
separate calculations, (2) modify the language relating to which ETF 
positions are excluded from the Gap Risk Measure, (3) adjust both the 
trigger for applying the Gap Risk Measure and the calculation of the 
Gap Risk Measure to be based on the two largest positions in a 
portfolio, rather than based on the single largest position,(4)(a) 
remove the description of the methodology in the Rules for calculating 
the gap risk haircut, (b) provide that, like the concentration 
threshold, gap risk haircuts would be calibrated from time to time 
based on backtesting and impact analysis and (c) change the floor of 
the gap risk haircut from 10 percent to 5 percent for the largest 
position and add a floor of the gap risk haircut of 2.5 percent for the 
second largest position subject to the Gap Risk Measure, and (5) make 
certain clarifications to the description of the Gap Risk Measure.
Proposed Changes to Application and Calculation of the Gap Risk Measure
    First, NSCC is proposing to make the result of the Gap Risk Measure 
calculation an additive component of Members' total VaR Charge, rather 
than applicable as the VaR Charge only when it is the highest result of 
three calculations. Following implementation of this proposed change, 
the total VaR Charge would be equal to the sum of (1) the greater of 
(a) the Core Parametric Estimation and (b) the Portfolio Margin Floor 
calculation; and (2) the Gap Risk Measure calculation. This proposed 
change would allow NSCC to collect the amount that results from a 
calculation of the Gap Risk Measure every time the concentration 
threshold is met which could improve NSCC's ability to mitigate 
idiosyncratic risks that it could face through the collection of the 
VaR Charge. Rather than being applied only if the Gap Risk Measure 
calculation exceeds the Core Parametric Estimation and the Portfolio 
Margin Floor calculation, the Gap Risk Measure calculation would apply 
every time the top two positions exceed the concentration threshold. 
Based on impact studies, NSCC believes this broader application 
together with the other proposed changes outlined below would better 
protect against more idiosyncratic risk scenarios than the current 
methodology.
    Second, NSCC is proposing to modify the Rules regarding the ETF 
positions that are excluded from the Gap Risk Measure calculation. The 
Rules currently state that only ``non-index'' positions are included in 
the Gap Risk Measure.\16\ NSCC is proposing to replace the reference to 
``non-index'' positions with a reference to ``non-diversified'' 
positions and add a footnote to Sections I(A)(1)(a)(i) and 
I(A)(2)(a)(i) of Procedure XV of the Rules to state that NSCC would 
exclude ETF positions from the calculation if the ETFs have 
characteristics that indicate that such positions are less prone to the 
effects of gap risk events, as determined by NSCC from time to time. 
NSCC has determined that certain ETFs, both index based and non-index 
based, are less prone to the effects of gap risk events as a result of 
having certain characteristics and, therefore, are less likely to pose 
idiosyncratic risks that the Gap Risk Measure is designed to mitigate. 
Such characteristics include whether the ETF tracks to an index that is 
linked to a broad based market index, contains a diversified underlying 
basket, is unleveraged or tracks an asset class that is less prone to 
gap risk. For instance, NSCC has determined to include certain 
commodity ETFs from the Gap Risk Measure that track to an index but 
that are not linked to a broad-based diversified commodity index. The 
proposed change would result in these commodity ETFs that track to an 
index but that are not linked to a broad-based diversified commodity 
index to be subject to the Gap Risk Measure whereas they are currently 
excluded. NSCC has determined to exclude certain non-index based ETFs 
from the Gap Risk Measure that track to an asset that are less prone to 
gap risk, such as unleveraged U.S. dollar based ETFs. The proposed 
change would result in certain non-index based ETFs being excluded from 
the Gap Risk Measure whereas they are currently included.
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    \16\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of 
Procedure XV of the Rules, supra note 6. See also Initial Filing, 
supra note 11.
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    NSCC currently identifies those positions that are less likely to 
pose idiosyncratic risks and excludes those positions from the 
calculation of the Gap Risk Measure.\17\ The proposed change would 
provide Members with further transparency regarding which positions are 
excluded from this calculation by reflecting that certain non-index 
ETFs that have characteristics that indicate that such positions are 
less prone to the effects of gap risk events would be excluded and by 
reflecting that index based ETFs would only be excluded if they have 
characteristics that indicate that such positions are less prone to the 
effects of gap risk events. NSCC would also indicate in the Rules that 
such characteristics include whether the ETF tracks to an index that is 
linked to a broad based market index, contains a diversified underlying 
basket, is unleveraged or tracks an asset class that is less prone to 
gap risk.
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    \17\ NSCC uses a third-party market provider to identify ETFs 
that meet its defined criteria of being diversified. ETFs that do 
not meet the criteria specified by NSCC are not included the Gap 
Risk Measure calculation.
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    Third, NSCC is proposing to adjust the trigger of the Gap Risk 
Measure to be based on the sum of the absolute values of the two 
largest non-diversified Net Unsettled Positions in a portfolio, rather 
than based on the absolute value of the single largest non-diversified 
Net Unsettled Position. More specifically, the Gap Risk Measure would 
be applicable if the sum of the absolute values of the two largest non-
diversified Net Unsettled Positions in the portfolio represents more 
than the concentration threshold determined by NSCC from time to time.
    In addition, the Gap Risk Measure would be calculated using the two 
largest non-diversified Net Unsettled Positions by multiplying each of 
the positions with a gap risk haircut and adding the sum of the 
resulting products. By applying the Gap Risk Measure to the two largest 
non-diversified positions in the portfolio, the Gap Risk Measure 
calculation would cover concurrent gap moves involving more than one 
concentrated position adding more flexibility and coverage to the Gap 
Risk Measure. The Gap Risk Measure charge for the two largest

[[Page 78161]]

positions would also provide coverage for gap events for smaller 
positions in the portfolio.
    Fourth, NSCC would be adjusting the calculation of the gap risk 
haircut and replacing the current description with a description like 
the description of the calculation for the concentration threshold. 
Currently, the gap risk haircut is determined by selecting the largest 
of the 1st and 99th percentiles of three day returns of a composite set 
of equities, using a look-back period of not less than 10 years that 
includes a one year stress period.\18\ With the current methodology, 
there is implicit overlapping of the risk covered by the core 
Parametric VaR and the Gap Risk Measure. Because NSCC would be using 
the Gap Risk Measure as an additive component to the VaR Charge rather 
than a substitutive component, NSCC does not believe that the current 
methodology for the gap risk haircut would result in an appropriate 
level. Instead of using the current methodology to calculate the gap 
risk haircut, NSCC would determine and calibrate the concentration 
threshold and the gap risk haircut from time to time based on 
backtesting and impact analysis. More specifically, the concentration 
threshold and the gap risk haircuts would be selected from various 
combinations of concentration thresholds and gap risk haircuts based on 
backtesting and impact analysis across all member portfolios initially 
over a five year look-back period. This would provide more flexibility 
to set the parameters from time to time to provide improved backtesting 
performance, broader coverage for idiosyncratic risk scenarios and 
flexibility for model tuning to balance performance and cost 
considerations.
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    \18\ Id.
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    In connection with the proposed expansion of the calculation of the 
Gap Risk Measure to be based on the two largest non-diversified Net 
Unsettled Positions in the portfolio, NSCC is also proposing to lower 
the gap risk haircut that would be applied to the largest non-
diversified Net Unsettled Position to be a percent that is no less than 
5 percent. Currently, the percent that is applied to the largest non-
index Net Unsettled Positions in the portfolio is no less than 10 
percent.\19\ Given the proposed expansion of the calculation of the Gap 
Risk Measure to cover the two largest non-diversified Net Unsettled 
Positions, rather than only the single largest non-diversified Net 
Unsettled Position, NSCC believes it is appropriate to set a lower 
floor for the gap risk haircut that applies to the largest of those two 
positions. Given that the Gap Risk Measure would be additive rather 
than a substitutive component of the VaR Charge and would be triggered 
more frequently, NSCC believes that the flexibility to set a lower 
floor for the largest position would be appropriate. The gap risk 
haircut that would be applied to the second largest non-diversified Net 
Unsettled Position in the portfolio would be no larger than the gap 
risk haircut that would be applied to the largest non-diversified Net 
Unsettled Position and would be subject to a floor of 2.5 percent.
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    \19\ Id.
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    Initially, upon implementation, NSCC would set the concentration 
threshold at 10%, apply a gap risk haircut on the largest Net Unsettled 
Position of 10% and a gap risk haircut on the second largest Net 
Unsettled Position of 5%. NSCC would set the concentration threshold 
and the gap risk haircuts based on backtesting and impact analysis from 
time to time in accordance with NSCC's model risk management practices 
and governance set forth in the Model Risk Management Framework 
(``Model Risk Management Framework'').\20\ NSCC's model risk management 
governance procedures include daily backtesting of model performance, 
periodic sensitivity analyses of models and annual validation of 
models. NSCC would review the concentration threshold and the gap risk 
haircuts at least annually. NSCC would provide notice to Members by 
important notice of the concentration threshold and gap risk haircuts 
that it would be applying and changes to the concentration threshold 
and to the gap risk haircuts.
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    \20\ See Securities Exchange Act Release Nos. 81485 (August 25, 
2017), 82 FR 41433 (August 31, 2017) (File No. SR-NSCC-2017-008); 
84458 (October 19, 2018), 83 FR 53925 (October 25, 2018) (File No. 
SR-NSCC-2018-009), 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) 
(File No. SR-NSCC-2020-008), 92381 (July 13, 2021), 86 FR 38163 
(July 19, 2021) (File No. SR-NSCC-2021-008), and 94272 (February 17, 
2022), 87 FR 10419 (February 24, 2022) (File No. SR-NSCC-2022-001). 
The Model Risk Management Framework sets forth the model risk 
management practices adopted by NSCC.
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    Therefore, upon implementation, to determine the Gap Risk Measure 
for each portfolio, NSCC would determine the two largest non-
diversified positions in the portfolio. If the sum of the gross market 
values of those two positions represent more than the concentration 
threshold of 10% of the gross market value of the portfolio, NSCC would 
add (i) an amount equal to 10% of the gross market value of the largest 
position and (ii) an amount equal to 5% of the gross market value of 
the second largest position. The sum amount would be included in the 
volatility component of the Required Fund Deposit for that portfolio.
    As described in the Initial Filing, the Gap Risk Measure is 
designed to measure concentration of positions in a portfolio, which is 
an important indicator of that portfolio's vulnerability to 
idiosyncratic risks. By expanding the applicability of the Gap Risk 
Measure to each time the concentration threshold is met, the proposed 
changes to enhance the calculation of the Gap Risk Measure, described 
above, would improve the effectiveness of the VaR Charge in mitigating 
against those risks.
Proposed Changes To Improve Transparency
    Fifth, NSCC would make the following clarification changes to 
improve transparency in the Rules.
    NSCC is proposing to remove the specific references to the 
concentration threshold as 30 percent in the definition to reflect that 
NSCC may adjust the concentration threshold from time to time, as 
determined by NSCC based on the backtesting results and impact analysis 
over a look-back period of no less than the previous 12 months.\21\ The 
Rules currently define the concentration threshold as more than 30 
percent of the value of the entire portfolio.\22\ The Rules also 
provide that the concentration threshold would be no more than 30 
percent and would be determined by NSCC from time to time.\23\ The 
proposed changes would clarify that the concentration threshold is not 
fixed at 30 percent by defining concentration threshold as a percentage 
designated by the Corporation of the value of the entire portfolio 
which is determined by NSCC from time to time. The Rules would continue 
to state that the concentration threshold would be no more than 30 
percent. NSCC believes this proposed change will help clarify that the 
concentration threshold could change from time to time but could not be 
set to be more than 30 percent.
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    \21\ Id.
    \22\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of 
Procedure XV of the Rules, supra note 6. See also Initial Filing, 
supra note 11.
    \23\ Id.
---------------------------------------------------------------------------

    NSCC would revise language relating to the application of the Gap 
Risk Measure to Securities Financing Transactions (``SFTs''). Rule 56 
governs the SFT Clearing Service.\24\ Section 12(c) of Rule 56 
(``Section 12(c)'') provides that NSCC shall calculate the amount of 
each SFT Member's required deposit for SFT Positions by applying the 
Clearing Fund Formula for CNS

[[Page 78162]]

Transactions set forth in certain sections in Procedure XV.\25\ 
Footnote 1 (``Footnote 1'') in Section 12(c) provides that for purposes 
of applying the VaR Charge with respect to SFT Positions, NSCC shall 
apply the Gap Risk Measure as an additive component of the VaR Charge, 
which is consistent with how Net Unsettled Positions would be treated 
by the proposed changes.\26\ Pursuant to Footnote 1, NSCC has been 
applying the Gap Risk Measure as an additive component of the VaR 
Charge with respect to SFT Positions but applying the Gap Risk Measure 
to other Net Unsettled Positions as a substitutive component as 
currently set forth in Procedure XV of the Rules. If the proposed 
changes contemplated by this filing were implemented, it would be 
unnecessary to distinguish how the Gap Risk Measure is calculated for 
SFT Positions because the Gap Risk Measure would be applied to SFT 
Positions in the same manner as it would be applied to other Net 
Unsettled Positions. As a result, NSCC is proposing to remove Footnote 
1.
---------------------------------------------------------------------------

    \24\ Rule 56, supra note 4.
    \25\ Section 12(c) of Rule 56, supra note 4.
    \26\ See Footnote 1, supra note 4, which states ``For the 
purpose of applying Section I.(A)(1)(a)(i) of Procedure XV (Value-
at-Risk (VaR) charge), the volatility of an SFT Member's SFT 
Positions shall be the sum of (a) the highest resultant value 
between Section I.(A)(1)(a)(i)I. (Core Parametric Estimation) and 
Section I.(A)(1)(a)(i)III. (Margin Floor) and (b) the resultant 
value of Section I.(A)(1)(a)(i)II. (Gap Risk Measure).''
---------------------------------------------------------------------------

    NSCC is also proposing to change the reference from ``positions'' 
to ``Net Unsettled Positions'' or ``Net Balance Order Unsettled 
Positions'', as applicable, to clarify that the positions subject to 
the Gap Risk Measure are Net Unsettled Positions. NSCC would also 
remove ``the portfolio's'' from the provision relating to how the 
concentration threshold and gap risk haircuts would be determined and 
calibrated because the reference is unnecessary. The same concentration 
threshold and gap risk haircuts would apply to all portfolios and would 
be calibrated based on backtesting and impact analysis of multiple 
portfolios. In addition, in accordance with the Model Risk Management 
Framework,\27\ NSCC conducts periodic impact analysis of its models, 
including impacts on NSCC and impacts on Members. As such, NSCC is 
proposing to include ``impact analysis'' in addition to backtesting 
results as a measure of what NSCC would review to determine and 
calibrate the concentration threshold and gap risk haircuts. NSCC is 
also proposing to replace ``would'' with ``shall'' in four places to 
reflect that it is referring to future actions. NSCC would add ``gross 
market'' in front of ``value'' in two places and replace ``absolute'' 
with ``gross market'' in two places to clarify that NSCC would be using 
the gross market value of the positions and the portfolio in the Gap 
Risk Measure calculations. NSCC would also add a sentence in the Gap 
Risk Measure sections indicating that NSCC would announce updates of 
the concentration threshold and gap risk haircuts by Important Notice.
---------------------------------------------------------------------------

    \27\ See Model Risk Management Framework, supra note 20.
---------------------------------------------------------------------------

Proposed Changes to NSCC Rules
    The proposed changes described above would be implemented by 
amending the description of the VaR Charge in Sections I(A)(1)(a)(i) 
and I(A)(2)(a)(i) of Procedure XV of the Rules. The proposed changes 
would also move the descriptions of the Portfolio Margin Floor and the 
Gap Risk Measure to Sections I(A)(1)(a)(i)II and I(A)(2)(a)(i)II and 
Sections I(A)(1)(a)(i)III and I(A)(2)(a)(i)III of Procedure XV, 
respectively.
    The proposed changes would amend the description of the VaR Charge 
to state that it would be equal to the sum of (1) the highest resultant 
value among Sections I(A)(1)(a)(i)I and I(A)(2)(a)(i)I (which describe 
the Core Parametric Estimation) and Sections I(A)(1)(a)(i)II and 
I(A)(2)(a)(i)II (which would describe the Portfolio Margin Floor); and 
(2) the resultant value of Sections I(A)(1)(a)(i)III and 
I(A)(2)(a)(i)III (which would describe the Gap Risk Measure).
    The proposed changes would amend the description of the Gap Risk 
Measure to refer to the two largest non-diversified Net Unsettled 
Positions in the portfolio, rather than the largest non-index position, 
as described above, would include a footnote in this description to 
clarify which positions are excluded from the calculation of the Gap 
Risk Measure and make the other changes described above in proposed 
Sections I(A)(1)(a)(i)III and I(A)(2)(a)(i)III.
    The proposed changes would also remove Footnote 1 from Rule 56 as 
described above.
(iv) Implementation Timeframe
    NSCC would implement the proposed changes no later than 60 Business 
Days after the later of the approval of the proposed rule change and 
the no objection to the advance notice \28\ by the Commission. NSCC 
would announce the effective date of the proposed changes by Important 
Notice posted to its website.
---------------------------------------------------------------------------

    \28\ NSCC filed this proposed rule change as an advance notice 
(File No. SR-NSCC-2022-802) with the Commission pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 
19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of 
the advance notice is available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------

2. Statutory Basis
    NSCC believes that the proposed changes are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, NSCC 
believes the proposed changes are consistent with Section 17A(b)(3)(F) 
of the Act,\29\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii), 
each promulgated under the Act,\30\ for the reasons described below.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78q-1(b)(3)(F).
    \30\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires that the rules of NSCC be 
designed to, among other things, assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible and promote the prompt and accurate 
clearance and settlement of securities transactions.\31\ As discussed 
above, NSCC is proposing enhancements to the Gap Risk Measure portion 
of the VaR Charge, one of the components of its Members' Required 
Deposits--a key tool that NSCC uses to mitigate potential losses to 
NSCC associated with liquidating a Member's portfolio in the event of 
Member default. NSCC believes the proposed changes are designed to 
assure the safeguarding of securities and funds which are in its 
custody or control or for which it is responsible because they are 
designed to enable NSCC to better limit its exposure to Members in the 
event of a Member default. More specifically, the proposal would expand 
the applicability of the Gap Risk Measure and NSCC's ability to collect 
amounts calculated through this component, which is designed to 
mitigate idiosyncratic risks that NSCC may face.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In its review of the Gap Risk Measure, NSCC conducted impact 
studies adjusting differing parameters and thresholds to determine a 
model that would provide improved backtesting performance, broader 
coverage for idiosyncratic risk scenarios and flexibility for model 
tuning to balance performance and cost considerations to Members. Based 
on the impact studies, NSCC determined that the following enhancements 
to the Gap Risk Measure described above would enhance the flexibility 
of the Gap Risk Measure to

[[Page 78163]]

broaden the scope of gap risk event coverage and to use parameters to 
allow for coverage of larger gap moves: (1) making the Gap Risk Measure 
an additive component of the Member's total VaR Charge when it is 
applicable, rather than being applied as the applicable VaR Charge when 
it is the largest of three separate calculations, (2) modifying the 
language relating to which ETF positions are excluded from the Gap Risk 
Measure, (3) adjusting both the trigger for applying the Gap Risk 
Measure and the calculation of the Gap Risk Measure to be based on the 
two largest positions in a portfolio, rather than based on the single 
largest position and (4)(a) removing the description of the methodology 
in the Rules for calculating the gap risk haircut, (b) providing that, 
like the concentration threshold, gap risk haircuts would be calibrated 
from time to time based on backtesting and impact analysis and (c) 
changing the floor of the gap risk haircut from 10 percent to 5 percent 
for the largest position and adding a floor of the gap risk haircut of 
2.5 percent for the second largest position subject to the Gap Risk 
Measure (``Gap Risk Measure Enhancements'').
    The Clearing Fund is a key tool that NSCC uses to mitigate 
potential losses to NSCC associated with liquidating a Member's 
portfolio in the event of Member default. Therefore, the Gap Risk 
Measure Enhancements would enable NSCC to better address the potential 
idiosyncratic risks that it may face when liquidating a portfolio that 
contains a concentration of positions, such that, in the event of 
Member default, NSCC's operations would not be disrupted, and non-
defaulting Members would not be exposed to losses they cannot 
anticipate or control. In particular, making the Gap Risk Measure 
additive would allow NSCC to collect the amount that results from a 
calculation of the Gap Risk Measure every time the concentration 
threshold is met which would improve NSCC's ability to mitigate 
idiosyncratic risks that it could face through the collection of the 
VaR Charge and better protect against more idiosyncratic risk scenarios 
than the current methodology. Modifying ETF positions that are subject 
to the Gap Risk Measure based on whether they are non-diversified 
rather than whether they are non-index would allow NSCC to more 
accurately determine which ETFs should be included and excluded from 
the Gap Risk Measure based on characteristics that indicate that such 
ETFs are more or less prone to the effects of gap risk events. 
Adjusting the Gap Risk Measure trigger and calculation to target the 
largest two non-diversified Net Unsettled Positions in a portfolio 
would cover concurrent gap moves involving more than one concentrated 
position providing more coverage of the Gap Risk Measure. Removing 
specific methodology metrics relating to the gap risk haircuts and 
adding that gap risk haircuts would be calibrated from time to time 
based on backtesting and impact analysis, lowering the floor for the 
gap risk haircut that applies to the largest of the two largest non-
diversified Net Unsettled Positions and setting a floor of 2.5 percent 
for the second largest non-diversified Net Unsettled Positions would 
allow NSCC to calibrate and set appropriate gap risk haircuts based on 
the Gap Risk Measure being additive rather than a substitutive 
component to the VaR Charge. In this way, the proposed rule change to 
introduce the Gap Risk Measure Enhancements are designed to assure the 
safeguarding of securities and funds which are in the custody or 
control of NSCC or for which it is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\32\
---------------------------------------------------------------------------

    \32\ Id.
---------------------------------------------------------------------------

    NSCC also believes the proposed changes to provide transparency to 
the Rules by (a) removing the references to 30 percent as the 
concentration threshold to reflect that it is adjusted from time, (b) 
removing Footnote 1 relating to the application of Gap Risk Measure for 
SFT Positions from Rule 56, (c) changing the reference from 
``positions'' to ``Net Unsettled Positions'' or ``Net Balance Order 
Unsettled Positions'', as applicable, (d) removing the unnecessary 
reference to ``the portfolio's'' in reference to backtesting results, 
(e) including a reference to ``impact analysis'' as a measure of what 
NSCC would review to determine and calibrate the concentration 
threshold and gap risk haircuts, (f) replacing ``would'' with ``shall'' 
in four places, (g) clarifying that the calculations would be referring 
to the gross market value of the positions and portfolios, and (h) 
adding a sentence indicating that NSCC would announce updates of the 
concentration threshold and gap risk haircuts by Important Notice 
(``Transparency Enhancements'') are consistent with the requirements of 
Section 17A(b)(3)(F) of the Act.\33\ Specifically, by enhancing the 
transparency of the Rules, the proposed changes would allow Members to 
more efficiently and effectively conduct their business in accordance 
with the Rules, which NSCC believes would promote the prompt and 
accurate clearance and settlement of securities transactions.
---------------------------------------------------------------------------

    \33\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Act requires, in part, that NSCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, including 
by maintaining sufficient financial resources to cover its credit 
exposure to each participant fully with a high degree of 
confidence.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    As described above, NSCC believes that the proposed changes would 
enable it to better identify, measure, monitor, and, through the 
collection of Members' Required Fund Deposits, manage its credit 
exposures to Members by maintaining sufficient resources to cover those 
credit exposures fully with a high degree of confidence. Specifically, 
NSCC believes that the Gap Risk Measure Enhancements would provide 
improved backtesting performance, broader coverage for idiosyncratic 
risk scenarios and flexibility for model tuning to balance performance 
and cost considerations to Members, and would address the potential 
increased risks NSCC may face related to its ability to liquidate a 
portfolio that is susceptible to such risks in the event of a Member 
default. In particular, making the Gap Risk Measure additive would 
allow NSCC to collect the amount that results from a calculation of the 
Gap Risk Measure every time the concentration threshold is met which 
would improve NSCC's ability to mitigate idiosyncratic risks that it 
could face through the collection of the VaR Charge and better protect 
against more idiosyncratic risk scenarios than the current methodology. 
Modifying ETF positions that are subject to the Gap Risk Measure based 
on whether they are non-diversified rather than whether they are non-
index would allow NSCC to more accurately determine which ETFs should 
be included and excluded from the Gap Risk Measure based on 
characteristics that indicate that such ETFs are more or less prone to 
the effects of gap risk events. Adjusting the Gap Risk Measure trigger 
and calculation to target the largest two non-diversified Net Unsettled 
Positions in a portfolio would cover concurrent gap moves involving 
more than one concentrated position providing more coverage of the Gap 
Risk Measure. Removing specific methodology metrics relating to the gap 
risk haircuts and adding that gap risk

[[Page 78164]]

haircuts would be calibrated from time to time based on backtesting and 
impact analysis, lowering the floor for the gap risk haircut that 
applies to the largest of the two largest non-diversified Net Unsettled 
Positions and setting a floor of 2.5 percent for the second largest 
non-diversified Net Unsettled Positions would allow NSCC to calibrate 
and set appropriate gap risk haircuts based on the Gap Risk Measure 
being additive rather than a substitutive component to the VaR Charge. 
NSCC compared a number of different models for the Gap Risk Measure 
with different parameters and thresholds, including the Gap Risk 
Measure Enhancements and determined that the Gap Risk Measure 
Enhancements improved backtesting performance, provided broader 
coverage for idiosyncratic risk scenarios and flexibility for model 
tuning to balance performance and cost considerations to Members.
    Therefore, NSCC believes that the proposal would enhance NSCC's 
ability to effectively identify, measure and monitor its credit 
exposures and would enhance its ability to maintain sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence. As such, NSCC believes the 
proposed changes are consistent with Rule 17Ad-22(e)(4)(i) under the 
Act.\35\
---------------------------------------------------------------------------

    \35\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act requires, in part, that NSCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    The Required Fund Deposits are made up of risk-based components (as 
margin) that are calculated and assessed daily to limit NSCC's credit 
exposures to Members, including the VaR Charge. NSCC's proposed Gap 
Risk Measure Enhancements are designed to more effectively address the 
risks presented by a portfolio that meets the concentration threshold 
and, therefore, is more susceptible to the impacts of idiosyncratic 
risks. NSCC believes the enhanced VaR Charge, as a result of the Gap 
Risk Measure Enhancements would enable NSCC to assess a more 
appropriate level of margin that accounts for these risks. In 
particular, making the Gap Risk Measure additive would allow NSCC to 
collect the amount that results from a calculation of the Gap Risk 
Measure every time the concentration threshold is met which would 
improve NSCC's ability to mitigate idiosyncratic risks that it could 
face through the collection of the VaR Charge and better protect 
against more idiosyncratic risk scenarios than the current methodology. 
Rather than being applied only if the Gap Risk Measure calculation 
exceeds the Core Parametric Estimation and the Portfolio Margin Floor 
calculation, the Gap Risk Measure calculation would apply every time 
the top two positions exceed the concentration threshold. Based on 
impact studies, NSCC believes this broader application together with 
the other proposed changes outlined below would better protect against 
more idiosyncratic risk scenarios than the current methodology 
Modifying ETF positions that are subject to the Gap Risk Measure based 
on whether they are non-diversified rather than whether they are non-
index would allow NSCC to more accurately determine which ETFs should 
be included and excluded from the Gap Risk Measure based on 
characteristics that indicate that such ETFs are more or less prone to 
the effects of gap risk events. Adjusting the Gap Risk Measure trigger 
and calculation to target the largest two non-diversified Net Unsettled 
Positions in a portfolio would cover concurrent gap moves involving 
more than one concentrated position providing more coverage of the Gap 
Risk Measure. Removing specific methodology metrics relating to the gap 
risk haircuts and adding that gap risk haircuts would be calibrated 
from time to time based on backtesting and impact analysis, lowering 
the floor for the gap risk haircut that applies to the largest of the 
two largest non-diversified Net Unsettled Positions and setting a floor 
of 2.5 percent for the second largest non-diversified Net Unsettled 
Positions would allow NSCC to calibrate and set appropriate gap risk 
haircuts based on the Gap Risk Measure being additive rather than a 
substitutive component to the VaR Charge. These proposed changes are 
designed to assist NSCC in maintaining a risk-based margin system that 
considers, and produces margin levels commensurate with, the risks and 
particular attributes of portfolios that meet the concentration 
threshold, as applied through the current methodology. Therefore, NSCC 
believes the proposed change is consistent with Rule 17Ad-22(e)(6)(i) 
under the Act.\37\
---------------------------------------------------------------------------

    \37\ Id.
---------------------------------------------------------------------------

    Rule 17A-d22(e)(23)(ii) under the Act requires, in part, that NSCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for sufficient information to 
enable participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in the covered clearing 
agency.\38\ By making the proposed Transparency Enhancements, the 
proposed changes would improve the transparency of the Rules. By 
providing Members with additional information that would enable them to 
evaluate the risks and material costs they incur by participating in 
NSCC, NSCC believes the proposed change is consistent with the 
requirements of Rule 17Ad-e)(23)(ii).\39\
---------------------------------------------------------------------------

    \38\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \39\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe the proposed Transparency Enhancements would 
impact competition. These proposed rule changes would merely enhance 
the transparency of the Rules. Therefore, this proposed changes would 
not affect NSCC's operations or the rights and obligations of Members. 
As such, NSCC believes this proposed rule change to improve the 
transparency of the Rules would not have any impact on competition.
    NSCC believes that the Gap Risk Measure Enhancements could have an 
impact on competition. Specifically, NSCC believes the proposed changes 
could burden competition because they would result in larger Required 
Fund Deposit amounts for Members when the additional charges are 
applicable and result in a Required Fund Deposit that is greater than 
the amount calculated pursuant to the current formula.
    When the proposal results in a larger Required Fund Deposit, the 
Gap Risk Measure Enhancements could burden competition for Members that 
have lower operating margins or higher costs of capital compared to 
other Members. However, the increase in Required Fund Deposit would be 
in direct relation to the specific risks presented by each Member's Net 
Unsettled Positions, and each Member's Required Fund Deposit would 
continue to be calculated with the same parameters and at the same 
confidence level for each Member. Therefore, Members that present 
similar Net Unsettled Positions, regardless of the type of Member, 
would have similar impacts on their Required Fund Deposit amounts. As 
such NSCC believes that any burden on competition imposed by the 
proposed changes would not be significant and, further, would be both

[[Page 78165]]

necessary and appropriate in furtherance of NSCC's efforts to mitigate 
risks and meet the requirements of the Act, as described in this filing 
and further below.
    NSCC believes the above described burden on competition that may be 
created by the proposed enhancement of the VaR Charge through the 
expansion of the Gap Risk Measure would be necessary in furtherance of 
the Act, specifically Section 17A(b)(3)(F) of the Act.\40\ As stated 
above, the proposed Gap Risk Measure Enhancements would improve NSCC's 
ability to mitigate against idiosyncratic risks that are presented by 
portfolios that meet the concentration threshold, including the risks 
related to gap risk events that are not driven by issuer events. 
Therefore, NSCC believes this proposed change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act, which requires that 
the Rules be designed to assure the safeguarding of securities and 
funds that are in NSCC's custody or control or which it is 
responsible.\41\
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1(b)(3)(F).
    \41\ Id.
---------------------------------------------------------------------------

    NSCC believes these proposed changes would also support NSCC's 
compliance with Rules 17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under 
the Act, which require NSCC to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to (x) 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence; and (y) cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\42\
---------------------------------------------------------------------------

    \42\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------

    As described above, NSCC believes the proposed Gap Risk Measure 
Enhancements would allow NSCC to employ a risk-based methodology to 
address the increased idiosyncratic risks presented by the occurrence 
of gap risk events that are presented by portfolios that meet the 
concentration threshold. Therefore, the proposed changes would better 
limit NSCC's credit exposures to Members, consistent with the 
requirements of Rules 17A-d22(e)(4)(i) and Rule 17Ad22-(e)(6)(i) under 
the Act.\43\
---------------------------------------------------------------------------

    \43\ Id.
---------------------------------------------------------------------------

    NSCC believes that the above-described burden on competition that 
could be created by the proposed changes would be appropriate in 
furtherance of the Act because such changes have been appropriately 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of NSCC or for which it is responsible, as 
described in detail above. The proposed enhancement to the VaR Charge 
through the expansion of the Gap Risk Measure would enable NSCC to 
produce margin levels more commensurate with the risks and particular 
attributes of each Member's portfolio.
    The proposed changes would do this by continuing to apply the Gap 
Risk Measure only when the concentration threshold is met. The proposed 
change to expand the sensitivity of the charge to refer to the two 
largest non-diversified Net Unsettled Positions in the portfolio would 
provide NSCC with a better measure of the various and unexpected 
idiosyncratic risks it may face, in light of the recent gap risk events 
that did not derive from issuer events. Therefore, because the proposed 
changes are designed to provide NSCC with an appropriate measure of the 
risks (i.e., risks related to gap risk events) presented by Members' 
portfolios, NSCC believes the proposal is appropriately designed to 
meet its risk management goals and its regulatory obligations.
    NSCC believes that it has designed the proposed changes in an 
appropriate way in order to meet compliance with its obligations under 
the Act. Specifically, the proposals would improve the risk-based 
margining methodology that NSCC employs to set margin requirements and 
better limit NSCC's credit exposures to its Members. Therefore, as 
described above, NSCC believes the proposed changes are necessary and 
appropriate in furtherance of NSCC's obligations under the Act, 
specifically Section 17A(b)(3)(F) of the Act \44\ and Rule 17Ad-
22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act.\45\
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78q-1(b)(3)(F).
    \45\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    NSCC has not received or solicited any written comments relating to 
this proposal. If any written comments are received, they will be 
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
Commission's Division of Trading and Markets at 
[email protected] or 202-551-5777.
    NSCC reserves the right not to respond to any comments received.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSCC-2022-015 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange

[[Page 78166]]

Commission, 100 F Street NE, Washington, DC 20549.

    All submissions should refer to File Number SR-NSCC-2022-015. 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 
(https://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-2022-015 and should be submitted on 
or before January 11, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
---------------------------------------------------------------------------

    \46\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27657 Filed 12-20-22; 8:45 am]
BILLING CODE 8011-01-P