[Federal Register Volume 88, Number 25 (Tuesday, February 7, 2023)]
[Notices]
[Pages 8013-8018]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-02509]



[[Page 8013]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96786; File No. SR-NSCC-2022-005]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change, as Modified by 
Amendment Nos. 1, 2, and 3, To Revise the Excess Capital Premium Charge

February 1, 2023.

I. Introduction

    On May 20, 2022, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2022-005 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 June 8, 2022,\3\ and the 
Commission has received comments regarding 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. 95026 (June 2, 2022), 87 
FR 34913 (June 8, 2022) (``Notice''). The Notice referred to an 
incorrect filing date of May 30, 2022; however, the proposal was 
filed on May 20, 2022, as indicated here. Moreover, the Notice 
reflected the filing of Amendment No. 1, which made a correction to 
Exhibit 5 of the filing, specifically, to insert an additional 
cross-reference into a proposed definition that had been omitted.
    \4\ Comments are available at https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005.htm.
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    On July 11, 2022, pursuant to Section 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 disapprove 
the proposed rule change.\6\ On September 1, 2022, the Commission 
instituted proceedings, pursuant to Section 19(b)(2)(B) of the Act,\7\ 
to determine whether to approve or disapprove the proposed rule 
change.\8\
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 95245 (July 11, 2022), 
87 FR 42523 (July 15, 2022).
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ Securities Exchange Act Release No. 95656 (Sept. 1, 2022), 
87 FR 55058 (Sept. 8, 2022).
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    On July 6, 2022, NSCC filed a partial amendment (``Amendment No. 
2'') to modify the proposed rule change.\9\ On November 28, 2022, NSCC 
filed another amendment (``Amendment No. 3'') to modify the proposed 
rule change.\10\ On December 1, 2022, the Commission published notice 
of filing of Amendment Nos. 2 and 3 and of an extension to the action 
date for the proposed rule change.\11\
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    \9\ Amendment No. 2 partially amended the proposed rule change 
to update the description of the impact of the proposal. In 
Amendment No. 2, NSCC also provided a revised version of the 
confidential impact study that it included as Exhibit 3a to the 
proposed rule change.
    \10\ Amendment No. 3 amended and replaced the proposed rule 
change in its entirety. Specifically, it clarified the particular 
circumstances in which NSCC would retain the ability to waive the 
excess capital premium charge, rather than remove NSCC's discretion 
to waive or reduce the charge as was initially proposed in the 
proposed rule change.
    \11\ Securities Exchange Act Release No. 96426 (Dec. 1, 2022), 
87 FR 75105 (Dec. 7, 2022) (``Amended Notice'').
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    For the reasons discussed below, the Commission is approving the 
proposed rule change, as modified by Amendment Nos. 1, 2 and 3 
(hereinafter, ``proposed rule change'').

II. Description of the Proposed Rule Change 12
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    \12\ Capitalized terms not defined herein are defined in NSCC's 
Rules and Procedures (``Rules''), available at http://dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
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    NSCC provides clearing, settlement, risk management, central 
counterparty services, and a guarantee of completion for virtually all 
broker-to-broker trades involving equity securities, corporate and 
municipal debt securities, and unit investment trust transactions in 
the U.S. markets. A key tool that NSCC uses to manage its credit 
exposure to its members is collecting an appropriate Required Fund 
Deposit (i.e., margin) from each member.\13\ A member's margin is 
designed to mitigate potential losses to NSCC associated with 
liquidation of the member's portfolio in the event of that member's 
default.\14\ The aggregate of all NSCC members' margin deposits 
(together with certain other deposits required under the Rules) 
constitutes NSCC's Clearing Fund, which NSCC would access should a 
member default and that member's margin, upon liquidation, be 
insufficient to satisfy NSCC's losses.\15\
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    \13\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters) of the Rules, supra note 12.
    \14\ Under NSCC's Rules, a default would generally be referred 
to as a ``cease to act'' and could encompass a number of 
circumstances, such as a member's failure to make a margin deposit 
in a timely fashion. See Rule 46 (Restrictions on Access to 
Services), supra note 12.
    \15\ See id.
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    A member's margin consists of a number of applicable components, 
each of which addresses specific risks faced by NSCC.\16\ Many of those 
components are designed to measure risks presented by the net unsettled 
positions a member submits to NSCC to be cleared and settled; however, 
certain components, often referred to as margin ``add-ons,'' measure 
and mitigate other risks that NSCC may face, such as credit risks.
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    \16\ See Procedure XV, supra note 12.
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    NSCC's excess capital premium (``ECP'') is one such add-on that 
makes up part of the margin that a member must pay to NSCC. The purpose 
of this charge is to mitigate the heightened default risk a member 
could pose to NSCC if it operates with lower capital levels relative to 
its margin requirements.\17\ Put another way, the ECP charge operates 
to collect additional margin if a member's exposure to NSCC based on 
its clearing activity is out of proportion to its capital.
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    \17\ See Securities Exchange Act Release No. 54457 (Sept. 15, 
2006), 71 FR 55239 (Sept. 21, 2006) (SR-FICC-2006-03 and SR-NSCC-
2006-03) (approving the ECP charge as a new component of the margin 
methodology).
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    As described in more detail below, the ECP charge applies when a 
specified portion of a member's required margin exceeds its capital by 
a ratio of more than 1.0 (defined in the Rules as the ``Excess Capital 
Ratio'').\18\ When the charge applies, NSCC determines its amount by 
multiplying the member's capital by this ratio, with the resulting 
amount serving as the add-on charge.
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    \18\ See Section I(B)(2) of Procedure XV, supra note 12.
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    NSCC's proposal would change both the calculation methodology and 
governance of the ECP charge in its Rules. With respect to the 
calculation of the charge, NSCC proposes to: (1) use the volatility 
charge of a member's margin requirement to compare a member's 
applicable capital amounts, as opposed to the current methodology which 
uses a specific ``calculated amount'' identified in the Rules; (2) when 
calculating the ECP charge, for members that are broker-dealers, use 
net capital amounts rather than excess net capital, and for all other 
members, use equity capital in the calculation of the ECP charge; and 
(3) establish a cap of 2.0 for the Excess Capital Ratio that is used in 
calculating a member's ECP charge. With respect to governance, NSCC 
proposes to: (1) identify the particular circumstances in which NSCC 
has the ability to waive the charge, including the information that 
NSCC would review in deciding whether to waive the ECP charge as well 
as the governance around the application of such waiver; and (2) 
provide that NSCC may calculate the charge based on updated capital 
information.
    NSCC has estimated the potential impacts of the proposal during the 
period of June 1, 2020 through December 31, 2021. The study showed that 
the proposal would have had no impact to NSCC's overall or member-level 
margin coverage, that is, that

[[Page 8014]]

NSCC would continue to collect margin that would cover its credit 
exposures to its members under the proposal. Further, the study showed 
that the proposal would have reduced the number of ECP charges that 
would have been triggered by the calculation by 65 percent, from 347 
ECP charges triggered for 19 members to 122 ECP charges triggered for 
14 members. The total aggregate amount that would have been triggered 
by the proposed calculation if the proposal was effective during that 
time would have been reduced from $51.31 billion (the actual total 
amount of ECP charges triggered by the current calculation during that 
period) to approximately $17.44 billion (the total amount of ECP 
charges that would have been triggered during that time by the proposed 
calculation), with the average amount per member reducing from $147.9 
million to approximately $143.0 million.\19\
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    \19\ See Amended Notice, supra note 11, 87 FR 75111. NSCC also 
submitted more detailed results of the impact study as confidential 
Exhibit 3 to the proposed rule change. NSCC requested confidential 
treatment of Exhibit 3 pursuant to 17 CFR 240.24b-2.
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A. Current Calculation and Governance of the ECP Charge

    NSCC's current methodology for determining applicability of the ECP 
charge is as follows. First, NSCC determines the member's ``Calculated 
Amount,'' pursuant to the Rules. The Calculated Amount is designed to 
represent the member's margin requirements to NSCC resulting from its 
unsettled positions, and it is made up of a number of the components of 
a member's margin.\20\ NSCC then divides the member's Calculated Amount 
by its current capital amount, which is the amount reported to NSCC 
pursuant to its ongoing membership standards.\21\
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    \20\ Specifically, the Rules define the Calculated Amount as a 
member's Required Fund Deposit excluding any applicable special 
charge, margin requirement differential charge, coverage component 
charge or margin liquidity adjustment charge, plus any additional 
amounts the member is required to deposit to the Clearing Fund 
either due to being placed on the Watch List or as an assurance of 
financial responsibility or operational capability. These various 
margin components and other concepts are described in the NSCC 
Rules. See Procedure XV, Sections I(A)(1)(c) and (2)(c) (special 
charge), I(A)(1)(e) and (2)(d) (margin requirement differential), 
I(A)(1)(f) and (2)(e) (coverage component), and I(A)(1)(g) and 
(2)(f) (margin liquidity adjustment charge), supra note 12; see also 
Rule 15, Section 2b(iv), supra note 12 (setting forth NSCC's 
authority to require adequate assurances of a member's financial 
responsibility).
    \21\ Members that are broker-dealers are required to maintain a 
certain level of excess net capital, and bank members are required 
to maintain a certain level of equity capital as a requirement for 
continued membership with NSCC. See Addendum B, supra note 12. 
Members are required to provide NSCC with financial information, 
including information regarding members' current capital amounts, on 
a regular basis, and NSCC uses these reported capital amounts in the 
calculation of the ECP charge. See Rule 2B, Section 2, supra note 
12.
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    Next, if the member's Calculated Amount divided by the applicable 
capital amount (referred to as the member's Excess Capital Ratio) is 
greater than 1.0, NSCC may require that member to make an ECP 
charge.\22\ The applicable ECP charge is the product of (1) the amount 
by which a member's Calculated Amount exceeds its applicable capital 
amount, multiplied by (2) the member's Excess Capital Ratio. However, 
NSCC has the authority to collect a lower ECP charge than the amount 
calculated pursuant to the Rules or to determine not to collect the ECP 
charge from a member at all, and it may return all or a portion of a 
collected ECP charge if it believes the imposition or maintenance of 
the ECP charge is not necessary or appropriate.\23\
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    \22\ Section I(B)(2) of Procedure XV, supra note 12.
    \23\ Id.
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    The Rules describe some circumstances when NSCC may determine not 
to collect an ECP charge from a member, which includes, for example, 
when an ECP charge results from trading activity for which the member 
submits later offsetting activity that lowers its Required Fund 
Deposit.\24\ The discretion to adjust, waive or return an ECP charge 
was designed to allow NSCC to determine when a calculated ECP charge 
may not be necessary or appropriate to mitigate the risks it was 
designed to address.\25\
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    \24\ See footnote 7 of Procedure XV, supra note 12.
    \25\ See note 17 supra.
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B. Amendments to the Calculation of the ECP Charge

    Use Members' Volatility Component Instead of the Calculated Amount. 
NSCC proposes to replace the Calculated Amount with the amount 
collected as that member's volatility component of its margin for 
purposes of determining the applicability of the ECP charge. The 
volatility component measures the market price volatility of a member's 
portfolio,\26\ and it usually comprises the largest portion of a 
member's margin.
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    \26\ See Sections I(A)(1)(a)(i)-(iii) and (2)(a)(i)-(iii) of 
Procedure XV of the Rules, supra note 12. NSCC has two methodologies 
for calculating the volatility component--a model-based volatility-
at-risk, or VaR, charge, and a haircut-based calculation, for 
certain positions that are excluded from the VaR charge calculation.
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    Currently, determining a member's Calculated Amount requires a more 
complicated calculation, as it uses a member's margin, but excludes 
certain components and includes other deposits. The proposal would 
simplify this calculation by using only the volatility component. NSCC 
states that one of the tools it provides to its members is a calculator 
that allows them to determine their potential volatility charge based 
on trading activity, and that, therefore, this proposed change would 
make the calculation of the ECP charge both clearer and more 
predictable for members.\27\
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    \27\ Amended Notice, supra note 11, 87 FR at 75108.
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    Use Net Capital for Broker-Dealer Members and Equity Capital for 
All Other Members in the Calculation of the ECP Charge.\28\ NSCC is 
proposing to use net capital, rather than excess net capital, for 
broker-dealer members when calculating the ECP charge. NSCC states that 
this revision would align the capital measures used for broker-dealer 
members and other members, which would result in more consistent 
calculations of the ECP charge across different types of members.\29\ 
NSCC also states that using net capital rather than excess net capital 
would provide NSCC with a better measure of the increased default risks 
presented when a broker-dealer member operates at low net capital 
levels relative to its margin requirements.\30\
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    \28\ To effectuate these changes, NSCC proposes to adopt revised 
and new defined terms. Specifically, NSCC would include a new 
defined term for ``Equity Capital'' and revise a defined term for 
``Net Capital.'' The proposal would also revise the Rules describing 
the calculation of the ECP charge and identifying membership 
qualifications, to use the new and/or revised defined terms, as 
appropriate. In addition, NSCC would identify the reporting 
requirements that NSCC relies on to obtain the capital information 
for members.
    \29\ Amended Notice, supra note 11, 87 FR at 75108.
    \30\ See id. NSCC states that this approach would be consistent 
with the rationale for the Commission's amendments to Rule 15c3-1 
under the Act, which were designed to promote a broker-dealer's 
capital quality and require the maintenance of ``net capital'' 
(i.e., capital in excess of liabilities) in specified amounts as 
determined by the type of business conducted. Id. (citing 17 CFR 
240.15c3-1; Securities Exchange Act Release No. 70072 (July 30, 
2013), 78 FR 51823 (Aug. 21, 2013) (File No. S7-08-07)). NSCC 
believes that Rule 15c3-1 provides an effective process of 
separating liquid and illiquid assets and computing a broker-
dealer's regulatory net capital that should replace NSCC's existing 
practice of using excess net capital in the calculation of the ECP 
charge. Id.
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    In addition, NSCC is proposing to provide that, for all members 
that are not broker-dealers, it would use equity capital in calculating 
the ECP charge, rather than the capital amount set forth in NSCC's 
membership standards.\31\

[[Page 8015]]

Currently, for all members that are not banks, non-bank trusts or 
broker-dealers (which generally include, for example, exchanges and 
registered clearing agencies), NSCC uses those members' reported equity 
capital in the calculation of the ECP charge. Therefore, in practice, 
the ECP charge is calculated for the majority of members that are not 
broker-dealers using their equity capital, and this proposed change is 
not expected to have a material impact on the collection of ECP 
charges.\32\ NSCC states that the proposal would simplify the 
calculation of the ECP charge for members that are not broker-dealers 
by providing that NSCC would use equity capital rather than use 
different measures that are based on other membership requirements, and 
that it would also create consistency across members.\33\
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    \31\ NSCC's Rules identify the applicable capital measures as 
follows: for bank members, equity capital; for members that are 
trust companies and not banks, consolidated capital; and for other 
legal entities that are members, an amount determined by NSCC. See 
Section 1.B of Addendum B, supra note 12.
    \32\ Amended Notice, supra note 11, 87 FR at 75108.
    \33\ Id. at 75109.
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    Establish a Cap for the Excess Capital Ratio. NSCC is proposing to 
set a maximum amount of the Excess Capital Ratio that is used in 
calculating members' ECP charge of 2.0. Specifically, the Excess 
Capital Ratio is the multiplier that is applied to the difference 
between a member's volatility charge and its applicable capital 
measure. Currently, the Rules do not include any cap on the Excess 
Capital Ratio.
    NSCC states that capping the multiplier would allow it to address 
the risks it faces without imposing an overly burdensome ECP 
charge.\34\ NSCC further states that, historically, the Excess Capital 
Ratio has rarely exceeded 2.0 in the calculation of members' ECP 
charges, and in cases when 2.0 was exceeded NSCC typically exercised 
the discretion provided to it in the Rules to reduce the applicable 
charge, which was appropriate because NSCC believes it is able to 
mitigate the risks presented to it by a member's lower capital levels 
by collecting an ECP charge calculated with an Excess Capital Ratio 
that is at or below 2.0.\35\ NSCC also states that this proposed change 
would provide members with more clarity and transparency, by allowing 
them to predict and estimate the maximum amount of their potential ECP 
charge.\36\
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    \34\ Id.
    \35\ Id.
    \36\ Id.
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C. Changes Regarding Governance of the ECP Charge

    NSCC's Ability to Waive the ECP Charge. NSCC would also revise its 
Rules to specify particular circumstances in which NSCC retains the 
ability to waive the ECP charge. NSCC states that the proposed changes 
to the calculation of the ECP charge would, taken together, eliminate 
most circumstances in which NSCC would have exercised this discretion. 
For example, the proposal to cap the Excess Capital Ratio at 2.0 and 
the proposal to specify that NSCC may calculate an ECP charge based on 
updated capital amounts (as described below), both address the most 
common circumstances when NSCC has either waived or reduced the ECP 
charge in the past.\37\
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    \37\ Id. at 75109-10.
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    However, NSCC believes that there may still be circumstances when 
it may not be necessary or appropriate to collect an ECP charge from a 
member, for example, in certain exigent circumstances when NSCC 
observes unexpected changes in market volatility or trading 
volumes.\38\ Therefore, NSCC is proposing to retain discretion to waive 
an ECP charge in certain defined circumstances and to specify the 
approval required to apply such discretion.
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    \38\ Id.
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    As proposed, NSCC's Rules would describe the exigent circumstances 
in which NSCC would retain the ability to waive an ECP charge as those 
when NSCC, in its sole discretion, observes extreme market conditions 
or other unexpected changes in factors such as market volatility, 
trading volumes or other similar factors. As noted above, NSCC states 
that, based on a review of past data, the proposed changes to the 
calculation of the ECP charge would otherwise eliminate most prior 
instances when an ECP charge was waived.\39\
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    \39\ Specifically, over the impact study period, NSCC waived and 
adjusted calculated ECP charges by $38.80 billion. NSCC waived a 
total of 33 ECP charges that totaled approximately $26.12 billion. 
Under the proposal, however, 14 of these charges would have been 
collected from members (although the amount would have been 
reduced), totaling $6.46 billion, 14 charges would not have been 
triggered as the calculated ECP ratio was below 1.0, and NSCC would 
have waived 5 of the ECP charges, mainly following receipt of 
updated financial information. NSCC adjusted the amount of 16 ECP 
charges by a total of approximately $12.69 billion. Under the 
proposal, 7 of these charges would have been still collected, 
totaling $6.48 billion, and 9 charges would not have been triggered 
as the calculated ECP ratio was below 1.0. See id. at 75111. See 
also supra note 17.
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    NSCC also states that there have been instances, particularly in 
recent years, when NSCC has waived the ECP charge in circumstances that 
would fall within the proposed identification of exigent circumstances, 
and that the ECP charge would have been triggered in such 
circumstances, even as amended by this proposed rule change. Such 
instances occurred multiple times in recent years, including, for 
example, during the extreme market volatility experienced in early 2020 
related to the global outbreak of the COVID-19 coronavirus and the meme 
stock market event in early 2021.\40\ Further, NSCC believes there 
remains some ongoing possibility that an unexpected increase in market 
volatility, for example, could cause a relative increase in a member's 
volatility charge, which may, in turn, trigger an ECP charge, even 
under the proposal.\41\
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    \40\ Amended Notice, supra note 11, 87 FR at 75109-10.
    \41\ Id. at 75110.
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    In such circumstances, under the proposal, NSCC would determine if 
the ECP charge being triggered at that time is not primarily caused by 
the risk presented by a member's capital levels and whether NSCC can 
effectively address the risk exposure presented by that member without 
the collection of the ECP charge. Alternatively, NSCC may determine, 
based on its review of the information available to it, that the ECP 
charge was appropriately triggered by a member's capital position or 
trading activity and was not driven primarily by the prevailing market 
conditions or other exigent circumstances. Therefore, NSCC believes it 
is appropriate to retain a certain amount of discretion to review an 
ECP charge that is triggered in such circumstances to determine whether 
a waiver of the ECP charge may be appropriate.\42\
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    \42\ Id.
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    In addition to defining the circumstances in which NSCC may waive 
the ECP charge, the proposed changes would also describe the review 
NSCC would conduct in deciding to waive the charge in the exigent 
circumstances, the information NSCC would consider in such review, and 
the approval required to waive the ECP charge. More specifically, the 
proposed rule change provides that NSCC would review all relevant facts 
and other information available to it at the time of its decision, 
including the degree to which a member's capital position and trading 
activity compare or correlate to the prevailing exigent circumstances 
and whether NSCC can effectively address the risk exposure presented by 
a member without the collection of the ECP charge from that member. For 
example, as noted above, if NSCC believes, based on its review of the 
relevant circumstances, that the risk exposure presented by a member is 
driven by the unexpected increase in

[[Page 8016]]

market volatility and not by a member's capital levels, NSCC may 
determine that it is appropriate to address such risk through the 
collection of a special charge from that member rather than an ECP 
charge.\43\
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    \43\ See Section I(A)(1)(c) and (2)(c) of Procedure XV, supra 
note 12 (allowing NSCC to collect, as part of margin ``[a]n 
additional payment (``special charge'') . . . in view of price 
fluctuations in or volatility or lack of liquidity of any 
security'').
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    Finally, the proposed rule change would specify the governance 
around a decision to waive an ECP charge, by identifying the level of 
NSCC officer who would be authorized to apply a waiver and by requiring 
that the decision be documented in a written report that is made 
available upon request to the affected member.\44\
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    \44\ NSCC also states that it would update its internal 
procedures to include waivers of the ECP charge in its regular 
updates to the Commission. Amended Notice, supra note 11, 87 FR at 
75110 n.37.
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    NSCC's Ability to Consider Updated Capital Information. Under the 
proposal, NSCC would provide that it may calculate the ECP charge based 
on updated capital information. As described above, NSCC would use the 
net capital or equity capital amounts that are reported on members' 
most recent financial reporting or financial statements delivered to 
NSCC in connection with the ongoing membership reporting requirements. 
Under the proposal, if a member's capital amounts change between the 
dates when it submits these financial reports, it may provide NSCC with 
updated capital information for purposes of calculating the ECP charge.
    NSCC is proposing to retain some discretion in when it would accept 
updated capital information for this purpose. For example, NSCC may 
require a member to provide documentation of the circumstances that 
caused a change in capital information, and if adequate evidence is not 
available or NSCC does not believe the evidence sufficiently verifies 
that the member's capital position has changed, NSCC would continue to 
calculate the ECP charge for that member based on the prior capital 
information available to NSCC until the next financial reporting or 
financial statements are delivered. NSCC believes it is appropriate to 
retain some discretion to allow NSCC to determine if updated capital 
information is adequately verified before it agrees to rely on that 
information for this calculation.\45\
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    \45\ Id. at 75110.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \46\ directs the Commission to 
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 the rules and regulations thereunder 
applicable to such organization. After carefully considering the 
proposed rule change, 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 
Section 17A(b)(3)(F) \47\ of the Act and Rules 17Ad-22(e)(6)(i) and 
(e)(23)(ii) thereunder.\48\
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    \46\ 15 U.S.C. 78s(b)(2)(C).
    \47\ 15 U.S.C. 78q-1(b)(3)(F).
    \48\ 17 CFR 240.17Ad-22(e)(6)(i) and (e)(23)(ii).
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A. Consistency With Section 17(A)(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, among other things, 
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 promote the public interest.\49\
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    \49\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that the proposed changes to the 
calculation of the ECP charge described in section II.B above should 
allow NSCC to ensure that it continues to collect margin sufficient to 
address the heightened default risk presented by a member operating 
with lower capital levels relative to its margin requirements. Based on 
its review of the proposed rule change, including the detailed impact 
analysis submitted as a confidential exhibit,\50\ the Commission 
understands that NSCC's margin coverage would not be impacted by this 
change and that NSCC would continue to collect sufficient margin to 
manage its potential exposure to its members.
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    \50\ See note 19 supra. The confidential analysis identified, on 
a member-by-member basis, the number of backtesting deficiencies 
during the impact study period.
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    In addition, the Commission believes that the proposed changes to 
the calculation of the ECP charge described in section II.B should 
result in a simplified and more straight-forward method for calculating 
the ECP charge, based on understandable metrics with which NSCC's 
members are familiar. For example, using a member's volatility charge, 
which is an established aspect of the overall margin requirements 
identified in NSCC's Rules, as opposed to the Calculated Amount that 
involves both including and excluding various margin components, is 
clearer and more predictable while still consistent with the purpose of 
the ECP charge. Similarly, using net capital and equity capital for 
broker-dealer members and all other members, respectively, in the 
calculation of the ECP charge would result in a more consistent 
calculation across different types of members.\51\ Moreover, capping 
the Excess Capital Ratio at 2.0 would be an appropriate balance between 
addressing the heightened default risk without imposing overly 
burdensome ECP charges.
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    \51\ One commenter asserted that NSCC should also consider the 
member's ability to pay for customer trades by settlement. Letter 
from John S. Markle, VP and Deputy General Counsel, Robinhood Inc., 
at 3-4 (Aug. 3, 2022), available at https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005-20135431-306323.pdf (``Robinhood 
Letter''). However, NSCC does not have access to that information as 
part of its normal course. The Commission therefore does not believe 
that it would be appropriate for NSCC to include that as part of the 
ECP charge calculation. However, this would not prohibit NSCC from 
considering that fact as part of its consideration of whether to 
waive an ECP charge. Similarly, the commenter asserted that NSCC 
should include a member's committed lines of credit in its 
determination of the member's capital. Id. at 4. However, the 
Commission believes that NSCC's stated desire to align the capital 
used for purposes of determining the ECP charge with the existing 
capital standards required for members is reasonable because it 
allows for consistency between different aspects of the Rules. In 
addition, the Commission believes that NSCC could, as part of its 
consideration whether to waive an ECP charge, consider such 
additional sources of funding if appropriate.
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    Together, by improving the consistency and predictability of the 
ECP charge, the proposed enhancements would also improve NSCC's ability 
to collect margin amounts that reflect the risks posed by its members 
such that, in the event of member default, NSCC's operations would not 
be disrupted, and non-defaulting members would not be exposed to losses 
they cannot anticipate or control. In this way, the proposed rule 
change is designed to promote the prompt and accurate clearance and 
settlement of securities transactions and 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.\52\
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    \52\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that the proposed changes set forth in both

[[Page 8017]]

sections II.B and II.C should improve transparency and understanding of 
the NSCC's governance and application of the ECP charge. For example, 
NSCC's proposal would describe the exigent circumstances in which NSCC 
may waive the ECP charge, describe what information NSCC would consider 
when determining whether to waive the charge, and specify the approval 
necessary to waive the charge.\53\ Moreover, using commonly understood 
inputs as the determinants of the ECP charge (i.e., using the 
volatility charge instead of the Calculated Amount and using net 
capital and equity capital instead of the current standards) and 
capping the Excess Capital Ratio at 2.0 should help members better 
anticipate and plan for a potential ECP charge. Through its client 
portal, NSCC provides regularly updated information to members about 
their volatility charges, such that a member should be able to better 
calculate and understand its potential ECP charge by using that 
information in conjunction with their capital, while also considering 
how the proposed cap on the Excess Capital Ratio would affect any 
eventual charge.\54\
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    \53\ The Commission received comments on this aspect of the 
proposal as it was initially filed, before Amendment No. 3, which 
are no longer relevant in light of the changes set forth in 
Amendment No. 3. See Robinhood Letter at 1-3; Letter from William 
Capuzzi, Chief Executive Officer, Apex Clearing Corporation, at 2 
(Aug. 24, 2022), available at https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005-20137445-307938.pdf (``Apex Letter''). 
Specifically, the commenters asserted that NSCC did not explain what 
would happen to members incurring an ECP charge if NSCC no longer 
had the discretion to waive the charge, as NSCC had proposed in the 
initial filing before Amendment No. 3. Because Amendment No. 3 
reintroduced the ability to waive the ECP charge in specified 
exigent circumstances, the Commission believes that these comments 
are addressed by the amendment.
    \54\ Commenters also asserted that NSCC should provide a 
curative period for members to address any potential application of 
the ECP charge, for example, by increasing the available capital or 
taking other measures. See Robinhood Letter at 4-5; Apex Letter at 
2. However, the Commission disagrees that such a curative period 
would be appropriate. The ECP charge is a part of a member's 
financial obligation to NSCC, payment of which is governed by NSCC's 
Rules, see Procedure XV, Section II(B), supra note 12, and is 
directly related to the exposure that the member poses to NSCC. 
Therefore, consistency in the timeframes for payment for the overall 
margin amount makes sense and helps NSCC to manage its exposure to 
its members. The Commission does not believe that the ECP charge 
necessitates a specific additional cure period, given that NSCC 
would still be obligated to guarantee the transactions of a 
defaulting member during the purported curative period.
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    Taken together, these proposed changes should help NSCC's members 
better anticipate their required margin because of the use of 
simplified inputs to the calculation of the ECP charge and the 
imposition of a cap on the applicable Excess Capital Ratio. This 
improved understanding of the potential margin requirements should, in 
turn, facilitate prompt and accurate clearance and settlement by 
removing potential ambiguity or confusion about a member's obligations 
to NSCC. Similarly, the Commission believes that the improved 
transparency provided by this proposed rule change both with respect to 
a member's margin obligations and the process by which NSCC would 
consider waiver of an ECP charge should provide members and the public 
with more clarity about the nature and application of the ECP charge 
and resolve potential ambiguity about when the ECP charge would or 
would not apply, which is consistent with promoting the public 
interest.
    For these reasons, the Commission therefore believes that the 
proposed changes are consistent with Section 17A(b)(3)(F) of the 
Act.\55\
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    \55\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) under the Act requires 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.\56\
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    \56\ 17 CFR 240.17Ad-22(e)(6)(i).
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    The Required Fund Deposits are made up of risk-based components (as 
margin) that are calculated and assessed daily to limit NSCC's 
exposures to members. NSCC's proposed changes to use the volatility 
charge rather than the Calculated Amount, and to use net capital and 
equity capital, as appropriate, in the calculation of the ECP charge 
would collectively make the calculation clearer and more predictable to 
members, while continuing to apply an appropriate risk-based charge 
designed to mitigate the risks presented to NSCC. Similarly, the 
proposal to cap the Excess Capital Ratio at 2.0 would allow NSCC to 
appropriately address the risks it faces without imposing an overly 
burdensome ECP charge and would reduce the circumstances in which NSCC 
may waive the charge, resulting in a more transparent margining 
methodology.\57\ Finally, the proposed rule change would clarify the 
exigent circumstances when NSCC may determine that it is appropriate to 
waive the ECP charge. Overall, these proposed changes would improve the 
effectiveness of the calculation of the ECP charge and, therefore, 
allow NSCC to more effectively address the increased default risks 
presented by members that operate with lower capital levels relative to 
their margin requirements.
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    \57\ One commenter asserted that NSCC should provide further 
support for capping the Excess Capital Ratio at 2.0, as opposed to a 
different figure such as 1.5. Robinhood Letter at 5. The commenter 
referenced statements that NSCC made in the proposed rule change, to 
argue that the ratio was not supported and that further analysis 
would be appropriate. Id. However, the Commission also reviewed the 
underlying impact analysis, submitted confidentially as part of the 
proposed rule change, see note 19 supra, which allows for a more 
detailed understanding of what the Excess Capital Ratio would have 
been under the proposal in each instance in which the ECP charge 
applied over the impact study period and, therefore, an 
understanding of how often the ratio would be, for example, between 
1.5 and 2.0. Based on the confidential data submitted, there is very 
limited incidence of members having an Excess Capital Ratio between 
1.5 and 2.0; using a ratio of 1.5 as suggested by the commenter, 
therefore, generally would not have a significant effect on the 
costs presented to members. The Commission therefore believes that 
the determination to use 2.0 is reasonable and represents an 
appropriate balance of addressing the risk presented and not being 
overly burdensome.
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    Taken together, the proposed changes enhance the ability of the ECP 
charge to produce margin levels commensurate with the risks NSCC faces 
related to its members' operating capital levels. Therefore, the 
Commission believes that the proposed rule change is consistent with 
Rule 17Ad-22(e)(6)(i) under the Act.\58\
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    \58\ Id.
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C. Consistency With Rule 17Ad-22(e)(23)(ii)

    Rule 17Ad-22(e)(23)(ii) under the Act requires that NSCC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for providing sufficient information to 
enable participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in NSCC.\59\
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    \59\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    As discussed above in section III.A, the Commission believes that 
the proposed changes set forth in both sections II.B and II.C should 
improve NSCC's members' ability to understand and estimate the 
potential magnitude of any ECP charge and to better anticipate when 
such a charge would apply and in what exigent circumstances NSCC would 
be able to waive the charge. The proposal would do this in several 
ways, including by simplifying and clarifying the inputs to the 
calculation of the ECP

[[Page 8018]]

charge, capping the Excess Capital Ratio at 2.0, and by providing 
additional information regarding NSCC's ability to waive the charge.
    Therefore, the Commission believes that these changes are 
consistent with Rule 17Ad-22(e)(23)(ii) under the Act.\60\
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    \60\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 1, 2, and 3, is 
consistent with the requirements of the Act, and in particular, the 
requirements of Section 17A of the Act \61\ and the rules and 
regulations thereunder.
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    \61\ 15 U.S.C. 78q-1(b)(3)(F).
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    It is therefore ordered, pursuant to Section 19(b)(2) \62\ of the 
Act, that the proposed rule change (SR-NSCC-2022-005), as modified by 
Amendment Nos. 1, 2, and 3, be, and hereby is, approved.
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    \62\ 15 U.S.C. 78s(b)(2)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\63\
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    \63\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-02509 Filed 2-6-23; 8:45 am]
BILLING CODE 8011-01-P