[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68777-68784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21936]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98589; File No. SR-NSCC-2023-009]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change Relating to the
Schedule of Haircuts for Eligible Clearing Fund Securities
September 28, 2023.
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 September 22, 2023, 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 primarily prepared by the clearing
agency. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of modifications to NSCC's Rules
& Procedures (``Rules'') \3\ in order to modify the schedule of
haircuts for Eligible Clearing Fund Securities and remove it from
Procedure XV of the Rules (``Procedure XV''), and make other clarifying
changes, as described in greater detail below.
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\3\ Capitalized terms not defined herein are defined in the
Rules, available at www.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 modify the schedule of haircuts for Eligible
Clearing Fund Securities, and to remove it and the related
concentration limits from Procedure XV, and make other clarifying
changes, as described in greater detail below.
Background
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.\4\ The Required Fund Deposit serves as each
member's margin.
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\4\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters), supra note 3. 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'').\5\ 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. The Clearing Fund
reduces the risk that NSCC would need to mutualize any losses among
non-defaulting members during the liquidation process.
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\5\ 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), supra note 3.
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Under Rule 4 (Clearing Fund), members are required to make deposits
to the Clearing Fund, with the amount of each member's Required Fund
Deposit being determined by NSCC in accordance with Rule 4. A member
may satisfy its Required Fund Deposit with cash or an open account
indebtedness secured by Eligible Clearing Fund Securities.\6\ Eligible
Clearing Fund Securities, comprised of certain agency, mortgage-backed,
and Treasury securities, are valued based on the prior Business Day's
closing market price, less a haircut, and may be subject to a
concentration limit.\7\ Haircuts are used to protect NSCC and its
members from price fluctuations, i.e., if NSCC is required to liquidate
collateral of an insolvent member and such collateral is worth less at
the time of liquidation than when it is pledged to NSCC. Concentration
limits are intended to reduce NSCC's risk by limiting the percentage of
certain types of Eligible Clearing Fund Securities pledged by members
to secure the Clearing Fund deposits. This is because when a member's
portfolio contains large net unsettled positions in a particular group
of securities with a similar risk profile or in a particular asset
type, such securities could present additional risk to NSCC.
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\6\ See Rule 4, Section 1, supra note 3.
\7\ See Rule 1 (Definitions) for applicable definitions,
including Eligible Clearing Fund Securities and its components,
which are Eligible Clearing Fund Agency Securities, Eligible
Clearing Fund Mortgage-Backed Securities, and Eligible Clearing Fund
Treasury Securities. Supra note 3.
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Currently, collateral haircuts applicable to relevant security
types and remaining maturity terms are specified as fixed percentages
in Section III.(A) of Procedure XV (``Section III.(A)'').\8\ The
sufficiency of collateral haircuts is evaluated through use of back-
tests, stress-tests and market observations. To ensure the sufficiency
of the collateral haircuts, a backtesting analysis of members'
collateral deposits is conducted daily, and summary reviews are
completed quarterly, each by the NSCC market risk group pursuant to
NSCC's internal market risk management policies and procedures. NSCC
performs daily backtesting of collateral by comparing the collateral
haircut for each member in simulated liquidations with the member's
actual collateral held on deposit at NSCC. Any exceptions noted are
escalated to management daily to assess the root cause and determine
whether further analysis and/or review would be appropriate.
Specifically, if NSCC determines that a particular security may present
inherent volatility and/or liquidity risks that could likely result in
an erosion in the value of the security exceeding the applicable
collateral
[[Page 68778]]
haircut, ad hoc reviews may be conducted by risk management pursuant to
NSCC's internal market risk management procedures. On a quarterly
basis, NSCC reviews and identifies instances where the simulated losses
from available historical stress testing scenario dates have exceeded
the collateral haircut values. In addition, each quarter, NSCC reviews
the composition of the Eligible Clearing Fund Securities that members
have pledged to secure their Required Fund Deposits in order to assess
the sufficiency of the collateral haircuts applied and whether any
haircut changes would be needed.
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\8\ See Section III.(A) of Procedure XV, supra note 3. Section
III.(A) was last modified in 2011 in order to conform the haircuts
to requirements of NSCC's lenders under its credit facilities. See
Securities Exchange Act Release No. 64487 (May 13, 2011), 76 FR
29019 (May 19, 2011) (SR-NSCC-2011-02).
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In addition to collateral haircuts, NSCC applies concentration
limits to certain Eligible Clearing Fund Securities. Currently, the
concentration limits applicable to certain Eligible Clearing Fund
Securities are specified in subsections (a) and (b) of Section II.(A)1.
of Procedure XV (``Section II.(A)1.'').\9\ Specifically, subsection (a)
provides any deposits of Eligible Clearing Fund Agency Securities or
Eligible Clearing Fund Mortgage-Backed Securities in excess of 25
percent of a member's Required Fund Deposit will be subject to a
haircut that is twice the amount of the percentage noted in Section
III.(A). In addition, footnote 7 of subsection (a) of Section II.(A)1.
provides that a member that is an Agency may not pledge Eligible
Clearing Fund Agency Securities of which it is the issuer. Footnote 8
of subsection (a) provides that with regard to a member that pledges
Eligible Clearing Fund Mortgage-Backed Securities of which it is the
issuer, such collateral will be subject to a premium haircut as
specified in Section III.(A). Subsection (b) of Section II.(A)1.
provides that no more than 20 percent of a member's Required Fund
Deposit may be in the form of Eligible Clearing Fund Agency Securities
that are of a single issuer.
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\9\ See Section II.(A)1. of Procedure XV, supra note 3.
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Changes to the collateral haircuts and concentration limits are
currently subject to NSCC's internal governance process and would
remain so with respect to the haircut schedule changes made in
accordance with this proposal. If NSCC determines that, based on the
analyses that it performs, there is insufficient/excessive collateral
haircut/concentration due to an identifiable cause that affected
multiple members and such cause would likely persist based on NSCC's
assessment of market conditions, such outcome or result could cause
NSCC to amend the haircuts/concentration limits in the haircut
schedule. If NSCC determines that a change to the haircut schedule is
warranted, its market risk group would document the recommendation and
rationale for the change at the time of such determination and obtain
approval from an executive director or above with a notice to the risk
management committee, in accordance with NSCC's internal market risk
management policies and procedures. Before making adjustments to the
haircut schedule, NSCC measures the potential impact of such
adjustments to ensure any impact is both necessary and appropriate.
Through its review, NSCC has observed that under volatile market
conditions with elevated frequency and magnitude of securities price
movements, the collateral value of Eligible Clearing Fund Securities
may shift in a relatively short period of time and the current haircuts
may not sufficiently account for the change in value. When the erosion
in the value of the Eligible Clearing Fund Securities exceeds the
relevant haircuts, NSCC is exposed to increased risk of potential
losses associated with liquidating a member's portfolio in the event of
a member default when the defaulting member's own margin is
insufficient to satisfy losses to NSCC caused by the liquidation of
that member's portfolio. Similarly, when a member's portfolio contains
large net unsettled positions in a particular group of securities with
a similar risk profile or in a particular asset type, such securities
could present additional risk to NSCC. The additional risk exposures
associated with liquidating a member's portfolio in the event of a
member default could lead to an increase in the likelihood that NSCC
would need to mutualize losses among non-defaulting members during the
liquidation process. However, any changes to the haircuts and/or
concentration limits currently requires a proposed rule change to be
filed with the Commission. In order to provide NSCC with more
flexibility in adjusting the haircuts and concentration limits so NSCC
can respond to changing market conditions more promptly in order to
mitigate the additional risk exposure, NSCC is proposing to remove
Section III.(A) and concentration limits from the Rules, and to publish
the haircuts and concentration limits in a haircut schedule on NSCC's
website.
Specifically, NSCC is proposing to delete subsections (a) and (b)
of Section II.(A)1., and delete Section III of Procedure XV. Currently,
subsections (a) and (b) of Section II.(A)1. set out certain
concentration limits for Eligible Clearing Fund Agency Securities and
Eligible Clearing Fund Mortgage-Backed Securities. Subsection (a)
provides that any deposits of Eligible Clearing Fund Agency Securities
or Eligible Clearing Fund Mortgage-Backed Securities, respectively, in
excess of 25 percent of a member's Required Fund Deposit will be
subject to an additional haircut equal to twice the percentage as
specified in Section III.(A). In addition, footnote 8 of subsection (a)
provides that with regard to a member that pledges Eligible Clearing
Fund Mortgage-Backed Securities of which it is the issuer, such
collateral will be subject to a premium haircut as specified in Section
III.(A). The same language from subsection (a) and footnote 8 of
Section II.(A)1. is in Section III.(A). Having this language in both
the Rules and the proposed haircut schedule is unnecessary and could
potentially create confusion for members. As such, NSCC is proposing to
eliminate this duplication by deleting subsection (a) and footnote 8 of
Section II.(A)1., and including this language in the proposed haircut
schedule.
Subsection (b) of Section II.(A)1. currently sets out an additional
concentration limit with respect to Eligible Clearing Fund Agency
Securities. Specifically, subsection (b) provides that no more than 20
percent of the Required Fund Deposit may be in the form of Eligible
Clearing Fund Agency Securities that are of a single issuer. In
addition, footnote 7 of subsection (a) provides that a member that is
an Agency may not pledge Eligible Agency Securities of which it is the
issuer. NSCC is proposing to delete subsection (b) and footnote 7 of
Section II.(A)1., and move this language to the proposed haircut
schedule. For clarity, NSCC is also proposing to revise the language
currently in footnote 7 of Section II.(A)1. to provide that no member
may pledge Eligible Clearing Fund Agency Securities of which it is the
issuer to secure its Required Fund Deposit. NSCC would also add
``Clearing Fund'' in the reference to ``Eligible Agency Securities''
currently in the language in subsection (b) of Section II.(A)1. to
reflect the correct defined term for Eligible Clearing Fund Agency
Securities, and move ``may be'' earlier in the first sentence for
clarity.
Furthermore, NSCC is proposing to add language in Section II.(A)1.
that makes it clear that all Eligible Clearing Fund Securities pledged
to secure Clearing Fund deposits shall, for collateral valuation
purposes, be subject to a haircut and may be subject to a concentration
limit. The proposed language would provide that NSCC shall determine
the applicable haircuts and any concentration limits from time to time
in accordance with its internal
[[Page 68779]]
policy and governance process, based on factors determined to be
relevant by NSCC, which may include, for example, backtesting results
and NSCC's assessment of market conditions, in order to set
appropriately conservative haircuts and/or concentration limits for the
Eligible Clearing Fund Securities and minimize backtesting deficiency
occurrences. The proposed language would also provide that the haircuts
and any concentration limits prescribed by NSCC shall be set forth in a
haircut schedule that is published on NSCC's website and that it shall
be the member's responsibility to retrieve the haircut schedule.
Section II.(A)1. would also indicate that NSCC will provide members
with at a minimum one Business Day's advance notice of any change in
the haircut schedule.
NSCC is proposing to delete Section III of Procedure XV, which
contains the haircut schedule. In addition, NSCC is proposing to (i)
remove references to Section III of Procedure XV in two places in Rule
4, and replace them with a reference to Section II.(A) of Procedure XV
in each case, (ii) remove references to subsections 1(a) and (b) of
Section II.(A) of Procedure XV and references to Section III of
Procedure XV in Rule 56 and (iii) remove a reference to Section III of
Procedure XV in Section II.(A) of Procedure XV, and replace it with a
reference to the proposed haircut schedule, to reflect the proposed
changes described above. NSCC is also proposing to make some
punctuation and grammar changes and add a reference to Procedure XV in
Section 12(c) of Rule 56 to clarify the language.
Finally, NSCC is proposing to clarify some language in Sections
I.(B)(1), II.(A), II.(B), II.(C) and II.(D) of Procedure XV to reflect
that Mutual Fund/Insurance Services Members and other Limited Members
are no longer required to make deposits into the Clearing Fund. In
2022, NSCC removed the requirement that any Limited Members, including
Mutual Fund/Insurance Services Members, make any deposits to the
Clearing Fund.\10\ Sections I.(B)(1), II.(A), II.(B), II.(C) and II.(D)
of Procedure XV still contain references to Mutual Fund/Insurance
Service Members and/or Limited Members making deposits into the
Clearing Fund, and NSCC is proposing to remove those references for
clarity.
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\10\ See Securities Exchange Act Release No. 93722 (Dec. 6,
2021), 86 FR 70548 (Dec. 10, 2021) (SR-NSCC-2021-015).
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NSCC believes that the proposed change to move the haircuts and
concentration limits from the Rules to the website would enable NSCC to
adjust the haircuts and concentration limits without undergoing a rule
filing process.\11\ By being able to make appropriate and timely
adjustments to the haircuts and concentration limits, NSCC would have
the flexibility to respond to changing market conditions more promptly.
Having the flexibility to respond to changing market conditions more
promptly would in turn help better ensure that NSCC collects sufficient
margin from members as well as risk manages its credit exposures to its
members. The proposed change would also align NSCC with the manner in
which its affiliate, The Depository Trust Company (``DTC''), provides
haircut schedules to participants.\12\
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\11\ Pursuant to Section 806(e)(1) of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act and Rule 19b-
4(n)(1)(i) under the Act, if a change materially affects the nature
or level of risks presented by NSCC, then NSCC is required to file
an advance notice. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1)(i).
\12\ DTC also allows its participants to pledge eligible
collateral as a portion of the participant fund; however, instead of
being in the DTC rulebook, the collateral haircut schedules are
published periodically by Important Notice to DTC participants.
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Concurrent with moving the haircuts and concentration limits from
the Rules to the website, NSCC is also proposing to reconfigure the
categories relating to Treasury securities haircuts by moving the
Treasury Inflation-Protected Securities (``TIPS'') to a separate
category and increasing the haircut levels for TIPS. The proposed
change to TIPS is reflected in Exhibit 3c to this filing. TIPS are a
type of Treasury security issued by the U.S. government that are
indexed to inflation such that the principal value of the security
rises as inflation rises.
In connection with NSCC's assessments of its collateral haircuts,
NSCC employs daily backtesting to determine the adequacy of each
member's collateral haircuts. NSCC compares the collateral haircuts for
each member with the simulated liquidation gains/losses using the
actual positions in the member's portfolio, and the actual historical
security returns. A backtesting deficiency occurs when a member's
collateral haircuts would not have been adequate to cover the simulated
liquidation losses.
In connection with such assessments, NSCC has determined that in
periods where the inflation rate fluctuates, the current haircut levels
for TIPS may be inadequate to address the fluctuations from time to
time. This is because TIPS are indexed to the inflation rate, and
prices on TIPS move inversely to their yields, e.g., when the inflation
rate increases, prices on TIPS decrease. When the decline in market
value of TIPS exceeds the haircut for TIPS, NSCC would be exposed to
potential liquidation losses. Accordingly, NSCC is proposing to
reconfigure and modify the haircut information that would be posted on
NSCC's website to ensure that the haircut levels would be commensurate
with the particular risk attributes of TIPS.
Specifically, NSCC would list TIPS of various maturity groupings in
a separate category from Treasury bills, notes and bonds. In addition,
NSCC would change the haircut level applicable for TIPS as follows:
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Maturity Current % Proposed %
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TIPS................................... Zero to 1 year................... 2.0 2.0
1 year to 2 years................ 2.0 3.0
2 years to 5 years............... 3.0 5.0
5 years to 10 years.............. 4.0 7.0
10 years to 15 years............. 6.0 7.0
15 years or greater.............. 6.0 10.0
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In determining the appropriate haircut levels for TIPS, NSCC
conducted a review of TIPS haircuts at other registered clearing
agencies and foreign central counterparty clearing houses (``CCPs'') to
compare NSCC's current TIPS haircuts with that required by registered
clearing agencies and foreign CCPs when TIPS are deposited to their
clearing funds, or the equivalent thereof. The results of the review
and comparison indicated that NSCC's current haircut levels for TIPS
are generally lower than the TIPS haircuts required by other clearing
agencies and
[[Page 68780]]
foreign CCPs, particularly with respect to maturity ranges of 10 years
or longer. While the TIPS haircut requirement at such other entities is
not dispositive as to the risk borne by NSCC or the proper TIPS haircut
levels to offset such risk, it is indicative of the TIPS haircuts being
applied to users of other similarly situated entities in order to use
the services of the clearing agencies and foreign CCPs and the impact
to such users. The chart below shows the haircuts that participants of
other clearing agencies and foreign CCPs are currently subject to when
using TIPS to meet their margin requirements, as compared with the
existing TIPS haircuts required at NSCC.
[GRAPHIC] [TIFF OMITTED] TN04OC23.013
NSCC is not proposing any changes to the concentration limits at
this time.
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\13\ See ICE Clear U.S. Acceptable Collateral and Haircuts,
available at www.theice.com/publicdocs/clear_us/ICUS_Collateral_Information.pdf.
\14\ See LCH LTD-Margin Collateral Haircut Schedule, available
at www.lch.com/system/files/media_root/Collateral/Acceptable%20Collateral%20Haircuts%20LCH%20Ltd_0.pdf.
\15\ See CME Group Acceptable Performance Bond Collateral for
Base Guaranty Fund Products, available at www.cmegroup.com/clearing/files/acceptable-collateral-futures-options-select-forwards.pdf.
\16\ See OCC Collateral Haircut Schedule, available at
www.theocc.com/clearance-and-settlement/acceptable-collateral-haircuts.
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Impact Study
NSCC conducted an impact study for the period from September 1,
2021 through August 31, 2022 (``Impact Study''). If the proposed
haircut adjustments had been in place during the Impact Study period,
the changes would have resulted in an average daily increase of
$197,000 in the Clearing Fund assuming TIPS were deposited. Two members
would have been impacted with a daily average dollar increase of
approximately $123,000 (or 0.10% of their average Clearing Fund
deposit) and $74,000 (or 0.31% of their average Clearing Fund deposit),
respectively, had the proposed changes been in place.
Implementation Timeframe
Subject to approval by the Commission, NSCC expects to implement
this proposal by no later than 60 Business Days after such approval and
would announce the effective date of the proposed changes by an
Important Notice posted to NSCC's website.
2. Statutory Basis
NSCC believes this proposal is consistent with the requirements of
the Act, and the rules and regulations thereunder applicable to a
registered clearing agency. Specifically, NSCC believes that the
proposed changes described above are consistent with Section
17A(b)(3)(F) of the Act,\17\ and Rules 17Ad-22(e)(4)(i), (e)(5),
(e)(6)(i), and (e)(6)(v), each promulgated under the Act,\18\ for the
reasons described below.
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(5), (e)(6)(i), and
(e)(6)(v).
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Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency be 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 the clearing agency or for which it is responsible.\19\ As
described above, NSCC believes the proposed changes to move the
collateral haircuts and concentration limits from the Rules to the
website would provide NSCC with more flexibility to respond to changing
market conditions because adjustments to the haircuts and concentration
limits would no longer require a rule change. By being able to make
appropriate and timely adjustments to the haircuts and concentration
limits, NSCC would have the flexibility to respond to changing market
conditions more promptly. NSCC believes that having this additional
flexibility to respond to changing market conditions more promptly
would help better ensure that NSCC (i) collects sufficient margin from
members to cover the risk exposures that NSCC may face in liquidating
members' portfolios and (ii) minimizes exposures from members with
large collateral positions in a particular group of securities with a
similar risk profile or in a particular asset type, such that, in the
event of a 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 to move
the collateral haircuts and concentration limits from the Rules to the
website would assure the safeguarding of securities and funds which are
in the custody and control of NSCC or for
[[Page 68781]]
which it is responsible, consistent with Section 17A(b)(3)(F) of the
Act.\20\
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\19\ 15 U.S.C. 78q-1(b)(3)(F).
\20\ Id.
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NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. NSCC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS have been inadequate to address the fluctuations from time to
time, and more conservative haircuts for TIPS are warranted. Having
haircut levels for TIPS that are commensurate with the particular risk
attributes of TIPS would enable NSCC to collect sufficient margin from
members to cover the risk exposures that NSCC may face in liquidating
members' portfolios such that, in the event of a 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 to move TIPS haircuts into a separate category
and raise the haircut levels for TIPS would assure the safeguarding of
securities and funds which are in the custody and control of NSCC or
for which it is responsible, consistent with Section 17A(b)(3)(F) of
the Act.\21\
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\21\ Id.
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NSCC believes that the proposed clarifying changes would help to
ensure that the Rules are clear to members. When members better
understand their rights and obligations regarding the Rules, members
are more likely to act in accordance with the Rules, which NSCC
believes would promote the prompt and accurate clearance and settlement
of securities transactions. As such, NSCC believes that the proposed
clarifying changes would be consistent with Section 17A(b)(3)(F) of the
Act.\22\
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\22\ Id.
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Rule 17Ad-22(e)(4)(i) under the Act \23\ requires a covered
clearing agency to 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 exposures arising from its payment, clearing, and settlement
processes by maintaining sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence. As described above, NSCC believes the proposed changes to
move the collateral haircuts and concentration limits from the Rules to
the website would provide NSCC with more flexibility to respond to
changing market conditions because adjustments to the haircuts and
concentration limits would no longer require a rule change. By being
able to make appropriate and timely adjustments to the haircuts and
concentration limits, NSCC would have the flexibility to respond to
changing market conditions more promptly. NSCC believes that having
this additional flexibility to respond to changing market conditions
more promptly would help ensure that NSCC (i) collects sufficient
margin from members to cover the risk exposures that NSCC may face in
liquidating members' portfolios and (ii) minimizes exposures from
members with large collateral positions in a particular group of
securities with a similar risk profile or in a particular asset type,
such that, in the event of a 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 to move the collateral haircuts and concentration limits
from the Rules to the website would help ensure that NSCC maintains
sufficient financial resources to cover its credit exposure to each
participant fully with a high degree of confidence, consistent with the
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\24\
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\23\ 17 CFR 240.17Ad-22(e)(4)(i).
\24\ Id.
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NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. NSCC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS may be inadequate to address the fluctuations from time to time,
and more conservative haircuts for TIPS are warranted. Ensuring that
the haircut levels for TIPS are commensurate with the particular risk
attributes of TIPS would in turn help ensure that NSCC requires members
to maintain sufficient margin to cover the credit exposures that NSCC
may face related to its ability to liquidate members' portfolios in the
event of a member default. In this way, the proposed rule change to
move TIPS haircuts into a separate category and raise the haircut
levels for TIPS would help ensure that NSCC maintains sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence, consistent with the
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\25\
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\25\ Id.
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Rule 17Ad-22(e)(5) under the Act \26\ requires, in part, a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to set and enforce
appropriately conservative haircuts and concentration limits if the
covered clearing agency requires collateral to manage its or its
participants' credit exposure. As described above, NSCC believes the
proposed changes to move the collateral haircuts and concentration
limits from the Rules to the website would provide NSCC with more
flexibility to respond to changing market conditions because
adjustments to the haircuts and concentration limits would no longer
require a rule change. By being able to make appropriate and timely
adjustments to the haircuts and concentration limits, NSCC would have
the flexibility to respond to changing market conditions more promptly.
NSCC believes that having this additional flexibility to respond to
changing market conditions more promptly would help better ensure that
NSCC (i) collects sufficient margin from members to cover the risk
exposures that NSCC may face in liquidating members' portfolios and
(ii) minimizes exposures from members with large collateral positions
in a particular group of securities with a similar risk profile or in a
particular asset type, such that, in the event of a member default,
NSCC's operations would not be disrupted, and non-defaulting members
would not be exposed to losses they cannot anticipate or control.
Specifically, NSCC would have the ability to promptly set and enforce
conservative collateral haircuts and concentration limits that are
reflective of the current market conditions. In this way, the proposed
changes to move the collateral haircuts and concentration limits from
the Rules to the website would help NSCC set and enforce appropriately
conservative collateral haircuts and concentration limits, consistent
with the requirements of Rule 17Ad-22(e)(5) under the Act.\27\
---------------------------------------------------------------------------
\26\ 17 CFR 240.17Ad-22(e)(5).
\27\ Id.
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NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. NSCC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS have been inadequate to address the fluctuations from time to
time, and more conservative haircuts for TIPS are
[[Page 68782]]
warranted. Specifically, NSCC would have the ability to set and enforce
conservative collateral haircuts that are commensurate with the
particular risk attributes of TIPS. In this way, the proposed changes
to move TIPS haircuts into a separate category and raise the haircut
levels for TIPS would help NSCC set and enforce appropriately
conservative collateral haircuts, consistent with the requirements of
Rule 17Ad-22(e)(5) under the Act.\28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(i) under the Act \29\ requires a covered
clearing agency to 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. NSCC believes that the proposed changes
to move the collateral haircuts and concentration limits from the Rules
to the website would provide NSCC with more flexibility to respond to
changing market conditions because NSCC would be able to make
appropriate adjustments to the haircuts and concentration limits
without a rule change. By being able to make appropriate and timely
adjustments to the haircuts and concentration limits, NSCC would have
the flexibility to respond to changing market conditions more promptly.
NSCC believes that having this additional flexibility to respond to
changing market conditions more promptly would enable NSCC to better
risk manage its credit exposure to its members by (i) collecting
sufficient margin from members to cover the risk exposures that NSCC
may face in liquidating members' portfolios and (ii) minimizing
exposures from members with large collateral positions in a particular
group of securities with a similar risk profile or in a particular
asset type, thus allowing NSCC to produce margin levels commensurate
with the risks and particular attributes of each relevant product,
portfolio, and market. Therefore, NSCC believes this proposed change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\30\
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\29\ 17 CFR 240.17Ad-22(e)(6)(i).
\30\ Id.
---------------------------------------------------------------------------
NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. NSCC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS may be inadequate to address the fluctuations from time to time,
and more conservative haircuts for TIPS are warranted. Ensuring that
the haircut levels for TIPS are commensurate with the particular risk
attributes of TIPS would allow NSCC to produce margin levels
commensurate with the risks and particular attributes of each relevant
product, portfolio, and market. Therefore, NSCC believes this proposed
change is consistent with Rule 17Ad-22(e)(6)(i) under the Act.\31\
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\31\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(v) under the Act \32\ requires a covered
clearing agency to 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, uses an appropriate method for measuring
credit exposure that accounts for relevant product risk factors and
portfolio effects across products. NSCC believes that the proposed
changes to move the collateral haircuts and concentration limits from
the Rules to the website would provide NSCC with more flexibility to
respond to changing market conditions more promptly because NSCC would
be able to make appropriate adjustments to the haircuts and
concentration limits without a rule change. Having this additional
flexibility would enable NSCC to better risk manage its credit exposure
to its members because NSCC would then be able to make appropriate and
timely adjustments to the haircuts and concentration limits, as
described above. Being able to adjust the haircuts and concentration
limits appropriately and timely would allow NSCC to better risk manage
its credit exposure to its members by (i) collecting sufficient margin
from members to cover the risk exposures that NSCC may face in
liquidating members' portfolios and (ii) minimizing exposures from
members with large collateral positions in a particular group of
securities with a similar risk profile or in a particular asset type,
thus producing margin levels commensurate with relevant product risk
factors and portfolio effects across products. Therefore, NSCC believes
this proposed change is consistent with Rule 17Ad-22(e)(6)(v) under the
Act.\33\
---------------------------------------------------------------------------
\32\ 17 CFR 240.17Ad-22(e)(6)(v).
\33\ Id.
---------------------------------------------------------------------------
NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. Specifically, as proposed, NSCC
would have collateral haircuts that are commensurate with the
particular risk attributes of TIPS. Ensuring that the haircut levels
for TIPS are commensurate with the particular risk attributes of TIPS
would allow NSCC to produce margin levels commensurate with relevant
product risk factors and portfolio effects across products. Therefore,
NSCC believes this proposed change is consistent with Rule 17Ad-
22(e)(6)(v) under the Act.\34\
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\34\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act requires that the rules of NSCC do
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\35\ NSCC does not believe the
proposed rule changes to move the haircuts and concentration limits
from the Rules to the website would impose a burden on competition.
These proposed changes are designed to enable NSCC to timely respond to
increases in market volatility with haircut requirements and
concentration limits that are more reflective of the current credit
exposures to NSCC. As discussed above, these proposed changes would
allow NSCC to better risk manage its credit exposure to its members by
(i) collecting sufficient margin from members to cover the risk
exposures that NSCC may face in liquidating members' portfolios and
(ii) minimizing exposures from members with large collateral positions
in a particular group of securities with a similar risk profile or in a
particular asset type, such that, in the event of a member default,
NSCC's operations would not be disrupted, and non-defaulting members
would not be exposed to losses they cannot anticipate or control. These
proposed changes would not unfairly inhibit access to NSCC's services,
or disadvantage or favor any particular member in relationship to
another member. The proposed changes would allow NSCC to adjust the
haircuts and concentration limits more promptly and would not otherwise
affect members' access to NSCC's services. In addition, any changes to
the haircuts or concentration limits would be directly related to the
perceived risk related to members' collateral based on back-tests,
stress-tests and market observations, and
[[Page 68783]]
would be applied uniformly to all members. Accordingly, NSCC believes
that these proposed changes would not impose any burden or have any
impact on competition.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
Similarly, NSCC does not believe the proposed rule changes to move
TIPS haircuts into a separate category would impose a burden on
competition. These proposed changes are designed to improve the clarity
and presentation of the haircut information. These proposed changes
would not unfairly inhibit access to NSCC's services, or disadvantage
or favor any particular member in relationship to another member, and
the changes would be applied uniformly to all members. Accordingly,
NSCC believes that these proposed changes would not impose any burden
or have any impact on competition.
NSCC believes the proposed changes to raise certain TIPS haircut
levels may have an impact on competition because these changes could
result in members' Eligible Clearing Fund Securities being subject to
higher haircuts than they would have been under the current haircut
schedule. NSCC believes that the proposed change could burden
competition by potentially increasing these members' operating costs by
requiring members who are using TIPS as collateral to pledge additional
collateral. Nonetheless, NSCC believes any burden on competition
imposed by the proposed changes would not be significant and,
regardless of whether such burden on competition could be deemed
significant, would be necessary and appropriate, as permitted by
Section 17A(b)(3)(I) of the Act for the reasons described in this
filing and further below.\36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
NSCC believes any burden on competition presented by the proposed
changes to the TIPS haircut levels would not be significant. As
discussed above, if the proposed changes to the TIPS haircut levels had
been in place during the Impact Study period, two members would have
been impacted with an daily average dollar increase of approximately
$123,000 (or 0.10% of their average Clearing Fund deposit) and $74,000
(or 0.31% of their average Clearing Fund deposit), respectively. In
addition, NSCC believes that the proposed changes to the TIPS haircut
levels are comparable with what is being required of users of other
similar registered clearing agencies and foreign CCPs when posting TIPS
as collateral.
NSCC believes any burden on competition that may be imposed by the
proposed changes to the TIPS haircut levels would be necessary because,
as described above, the proposed changes would help ensure that the
collateral values attributed to TIPS would be commensurate with the
particular risk attributes of TIPS. Making sure proper collateral
values are attributed to TIPS that are used as margin would thus help
better ensure that NSCC collects sufficient margin from members and
thereby assure the safeguarding of securities and funds which are in
the custody and control of NSCC or for which it is responsible,
consistent with Section 17A(b)(3)(F) of the Act.\37\
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
In addition, NSCC believes the proposed changes to the TIPS haircut
levels are necessary to support NSCC's compliance with Rules 17Ad-
22(e)(4)(i), (e)(5), (e)(6)(i), and (e)(6)(v) under the Act.
Specifically, as described above, NSCC believes these proposed changes
would ensure that the haircut levels for TIPS are commensurate with the
particular risk attributes of TIPS. Having haircut levels for TIPS that
are commensurate with the particular risk attributes of TIPS would
ensure proper collateral valuation for TIPS used as margin. Ensuring
proper collateral valuation for TIPS used as margin would help NSCC
better measure, monitor, and manage its credit exposures to
participants and those exposures arising from its payment, clearing,
and settlement processes, consistent with the requirements of Rule
17Ad-22(e)(4)(i) under the Act.\38\ Ensuring proper collateral
valuation for TIPS used as margin would also allow NSCC to set and
enforce appropriately conservative collateral haircuts, consistent with
the requirements of Rule 17Ad-22(e)(5) under the Act.\39\ It would also
help NSCC cover its credit exposures to its participants, consistent
with the requirements of Rules 17Ad-22(e)(6)(i) and (e)(6)(v) under the
Act.\40\
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\38\ 17 CFR 240.17Ad-22(e)(4)(i).
\39\ 17 CFR 240.17Ad-22(e)(5).
\40\ 17 CFR 240.17Ad-22(e)(6)(i) and (e)(6)(v).
---------------------------------------------------------------------------
NSCC also believes that any burden on competition that may be
imposed by the proposed changes to the TIPS haircut levels would be
appropriate in furtherance of the Act because these proposed changes
have been specifically designed to assure the safeguarding of
securities and funds which are in the custody and control of NSCC or
for which it is responsible, as required by Section 17A(b)(3)(F) of the
Act.\41\ As described above, NSCC believes these proposed changes would
help better ensure that NSCC collects sufficient margin from members,
thus enabling NSCC to produce margin levels more commensurate with the
risks it faces as a central counterparty. Accordingly, NSCC believes
these proposed changes are appropriately designed to meet its risk
management goals and regulatory obligations.
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
NSCC does not believe the proposed clarifying changes to the Rules
would impact competition. These changes would help to ensure that the
Rules remain clear. In addition, the changes would facilitate members'
understanding of the Rules and their obligations thereunder. These
changes would not affect NSCC's operations or the rights and
obligations of the membership. As such, NSCC believes the proposed
clarifying changes would not have any impact on competition.
(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 additional 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
SEC's Division of Trading and Markets at [email protected] or
202-551-5777.
NSCC reserves the right to not 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
[[Page 68784]]
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.
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-2023-009 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-NSCC-2023-009. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's website
(dtcc.com/legal/sec-rule-filings). Do not include personal identifiable
information in submissions; you should submit only information that you
wish to make available publicly. We may redact in part or withhold
entirely from publication submitted material that is obscene or subject
to copyright protection. All submissions should refer to File Number
SR-NSCC-2023-009 and should be submitted on or before October 25, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21936 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P