[Federal Register Volume 88, Number 57 (Friday, March 24, 2023)]
[Notices]
[Pages 17898-17900]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06059]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97171; File No. SR-NSCC-2022-015]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change To Make Certain
Enhancements to the Gap Risk Measure and the VaR Charge
March 20, 2023.
I. Introduction
On December 2, 2022, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2022-015 (the ``Proposed
Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed
Rule Change was published for comment in the Federal Register on
December 21, 2022,\3\ and the Commission has received one comment
regarding the changes proposed in the Proposed Rule Change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 96511 (Dec. 15,
2022), 87 FR 78157 (Dec. 21, 2022) (File No. SR-NSCC-2022-015)
(``Notice of Filing'').
\4\ Comments are available at https://www.sec.gov/comments/sr-nscc-2022-015/srnscc2022015.htm.
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On January 24, 2023, 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 approve or
disapprove the Proposed Rule Change.\6\ This order institutes
proceedings, pursuant to Section 19(b)(2)(B) of the Act,\7\ to
determine whether to approve or disapprove the Proposed Rule Change.
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\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 96740 (Jan. 24, 2023),
88 FR 5953 (Jan. 30, 2023) (SR-NSCC-2022-015).
\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change
A key tool that NSCC uses to manage its respective credit exposures
to its members is the daily collection of margin from each member,
which is referred to as each member's Required Fund Deposit.\8\ The
aggregated amount
[[Page 17899]]
of all members' margin constitutes the Clearing Fund, which NSCC would
access should a defaulted member's own margin be insufficient to
satisfy losses to NSCC caused by the liquidation of that member's
portfolio.
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\8\ The description of the Proposed Rule Change is based on the
statements prepared by NSCC in the Notice. See Notice, supra note 3.
Capitalized terms used herein and not otherwise defined herein are
defined in the Rules, available at https://www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
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Each member's margin consists of a number of applicable components,
each of which is calculated to address specific risks faced by NSCC.\9\
Generally, the largest portion of a member's margin is the volatility
component, often referred to as the VaR Charge, which is designed to
reflect the amount of money that could be lost on a portfolio over a
given period within a 99th percentile level of confidence. Under NSCC's
current rules, one of the potential methods of calculating the VaR
Charge relies on a measure of gap risk.\10\ It does not accrue for all
portfolios, but instead only serves as the VaR Charge if it is the
largest of three potential calculations.\11\ The gap risk charge was
designed to address the risk presented by a portfolio that is more
susceptible to the effects of gap risk events, i.e., those portfolios
holding positions that represent more than a certain percent of the
entire portfolio's value, such that the event could impact the entire
portfolio's value.\12\
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\9\ See Procedure XV of the Rules, supra note 8.
\10\ 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
price volatility levels.
\11\ Specifically, the VaR Charge is the greatest of (1) the
larger of two separate calculations based on different underlying
estimates that utilize a parametric VaR model, which addresses the
market risk of a member's portfolio (referred to as the core
parametric estimation), (2) the gap risk calculation, and (3) a
portfolio margin floor calculation based on the market values of the
long and short positions in the portfolio, which addresses risks
that might not be adequately addressed with the other volatility
component calculations.
\12\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 8. See also Exchange Act
Release Nos. 82780 (Feb. 26, 2018), 83 FR 9035 (Mar. 2, 2018) (SR-
NSCC-2017-808); 82781 (Feb. 26, 2018), 83 FR 9042 (Mar. 2, 2018)
(SR-NSCC-2017-020) (``Initial Filing'').
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To calculate the gap risk charge, NSCC multiplies the gross market
value of the largest non-index net unsettled position in the portfolio
by a gap risk haircut, which can be no less than 10 percent (``gap risk
haircut'').\13\ 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 plus a one-year stress
period, and 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 resulting haircut is then rounded up to the
nearest whole percentage and applied to the largest non-index net
unsettled position to determine the gap risk charge.
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\13\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV, supra note 8.
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As described in the Notice, NSCC proposes to modify Procedure XV
(Clearing Fund Formula and Other Matters) of NSCC's Rules & Procedures
(``Rules'') to make the following changes to the gap risk charge: (1)
make the gap risk charge an additive component of the member's total
VaR Charge when it is applicable, rather than being applied as the
applicable VaR Charge only when it is the largest of three separate
calculations, (2) adjusting the gap risk charge to be based on the two
largest positions in a portfolio, rather than based on the single
largest position, (3) changing the floor of the gap risk haircut from
10 percent to 5 percent for the largest position, adding a floor of the
gap risk haircut of 2.5 percent for the second largest position, and
providing that gap risk haircuts would be determined based on
backtesting and impact analysis, and (4) amending which ETF positions
are excluded from the gap risk charge to more precisely include ETFs
that are more prone to gap risk, i.e., are non-diversified.
III. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \14\ to determine whether the Proposed Rule
Change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the Proposed Rule Change. Institution of proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the Proposed Rule Change,
providing the Commission with arguments to support the Commission's
analysis as to whether to approve or disapprove the Proposed Rule
Change.
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\14\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\15\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of, and input from commenters with respect to, the Proposed
Rule Change's consistency with Section 17A of the Act,\16\ and the
rules thereunder, including the following provisions:
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\15\ Id.
\16\ 15 U.S.C. 78q-1.
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Section 17A(b)(3)(F) of the Act,\17\ which requires, among
other things, that the rules of a clearing agency must be designed to
promote the prompt and accurate clearance and settlement of securities
transactions, to assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible, and to protect investors and the public interest; and
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
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Rule 17Ad-22(e)(4)(i) of the Act, \18\ which requires that
a covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes, including by maintaining sufficient financial
resources to cover its credit exposure to each participant fully with a
high degree of confidence.
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\18\ 17 CFR 240.17Ad-22(e)(4)(i).
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Rule 17Ad-22(e)(6)(i) of the Act,\19\ which requires that
a covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to cover, if the
covered clearing agency provides central counterparty services, its
credit exposures to its participants by establishing a risk-based
margin system that, at a minimum, considers, and produces margin levels
commensurate with, the risks and particular attributes of each relevant
product, portfolio, and market.
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\19\ 17 CFR 240.17Ad-22(e)(6)(i).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the Proposed Rule Change. In particular, the Commission invites
the written views of interested persons concerning whether the Proposed
Rule Change is consistent with Section 17A(b)(3)(F) of the Act,\20\ and
Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii) of the Act,\21\ or
any other
[[Page 17900]]
provision of the Act, or the rules and regulations thereunder.
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\20\ 15 U.S.C. 78q-1(b)(3)(F).
\21\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the Proposed Rule Change should be approved
or disapproved by April 14, 2023. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
April 28, 2023.
The Commission asks that commenters address the sufficiency of
NSCC's statements in support of the Proposed Rule Change, which are set
forth in the Notice,\22\ in addition to any other comments they may
wish to submit about the Proposed Rule Change.
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\22\ See Notice, supra note 3.
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Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NSCC-2022-015 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSCC-2022-015. 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
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2022-015 and should be submitted on
or before April 14, 2023. Rebuttal comments should be submitted by
April 28, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(31).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-06059 Filed 3-23-23; 8:45 am]
BILLING CODE 8011-01-P