[Federal Register Volume 90, Number 228 (Monday, December 1, 2025)]
[Notices]
[Pages 55198-55201]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-21645]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104270; File No. SR-NSCC-2025-013]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving of Proposed Rule Change To Amend the CNS
Fails Charge in the NSCC Rules
November 25, 2025.
I. Introduction
On September 5, 2025, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\
proposed rule change SR-NSCC-2025-013 (``Proposed Rule Change'') to
modify the NSCC Rules & Procedures (``Rules'') regarding the margin
charge applied when a Member fails to settle a Short Position or a Long
Position by the
[[Page 55199]]
applicable settlement date (``CNS Fails Charge''). The Proposed Rule
Change was published for comment in the Federal Register on September
16, 2025.\3\ The Commission has received no comments on the Proposed
Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 103952 (Sept. 11,
2025), 90 FR 44735 (Sept. 16, 2025) (File No. SR-NSCC-2025-013)
(``Notice of Filing'').
---------------------------------------------------------------------------
On September 26, 2025, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the proposed rule changes.\5\ For the reasons
discussed below, the Commission is approving the Proposed Rule Change.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 104094 (Sept. 26,
2025), 90 FR 46977 (Sept. 30, 2025) (File No. SR-NSCC-2025-013).
---------------------------------------------------------------------------
II. Background
NSCC is a central counterparty, which means that it interposes
itself as the buyer to every seller and the seller to every buyer for
the financial transactions it clears. NSCC provides CCP services for
the U.S. equity market. As such, NSCC is exposed to the risk that one
or more Members may fail to make a payment or to deliver securities.\6\
---------------------------------------------------------------------------
\6\ Capitalized terms not defined herein shall have the meanings
ascribed to them in the Rules, available at https://www.dtcc.com/legal/rules-and-procedures.aspx.
---------------------------------------------------------------------------
A key tool that NSCC uses to manage its credit exposures to its
Members is the daily collection of the Required Fund Deposit (i.e.,
margin) from each Member. A Member's margin is designed to mitigate
potential losses to NSCC associated with liquidation of that Member's
portfolio in the event of that Member's default. The aggregate of all
NSCC's Members' Required Fund Deposits constitutes the Clearing Fund of
NSCC, which 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.\7\
---------------------------------------------------------------------------
\7\ See Rule 4 (Clearing Fund) and Procedure XV, supra note 6.
---------------------------------------------------------------------------
NSCC's Continuous Net Settlement System (``CNS'') is an automated
accounting and securities settlement system that centralizes and nets
the settlement of compared and recorded securities transactions and
maintains an orderly flow of security and money balances.\8\ Within
CNS, all eligible compared and recorded transactions for a particular
Settlement Date are netted by issue into one position per Member. The
position can be a net Long Position (receive), net Short Position
(deliver), or flat. As a continuous net system, those positions are
further netted with positions of the same CNS Security that remain open
after their original scheduled settlement date (usually one business
day after the trade date, or T+1), so that transactions scheduled to
settle on any day are netted with CNS Fails Positions (i.e., positions
that have failed in delivery or receipt on the Settlement Date), which
results in a single deliver or receive obligation for each Member for
each CNS Security in which the Member has activity.\9\
---------------------------------------------------------------------------
\8\ See NSCC Rule 11 (CNS System) and Procedure VII (CNS
Accounting Operation), id.
\9\ See Notice of Filing, supra note 3, 90 FR at 44736.
---------------------------------------------------------------------------
Each Member's Required Fund Deposit is comprised of several risk-
based component charges, including the CNS Fails Charge.\10\ NSCC
calculates and assesses the CNS Fails Charge on a daily basis from
Members with CNS Fails Positions, to offset the risk exposures to NSCC
and incentivize Members to satisfy their obligations on Settlement
Date. NSCC calculates the CNS Fails Charge based on the Member's credit
rating derived from the Credit Risk Rating Matrix (``CRRM''),\11\
meaning that, for each Member, it multiplies the Current Market Value
for that Member's aggregate CNS Fails Positions by a percentage.\12\
---------------------------------------------------------------------------
\10\ The CNS Fails Charge is currently imposed by NSCC pursuant
to Procedure XV (Clearing Fund Formula and Other Matters), Section
I.(A)(1)(d), supra note 6.
\11\ The CRRM is a credit risk rating model NSCC utilizes to
evaluate and rate the credit risk of NSCC's U.S. bank, foreign bank,
and U.S. broker-dealer Members, and rate such Members based upon
qualitative and quantitative information. See definition of Credit
Risk Rating Matrix in Rule 1 (Definitions and Descriptions), id.
\12\ For a Member that is not rated on the CRRM and for a Member
that is rated 1 through 4 on the CRRM, the CNS Fails Charge is 5% of
the Member's aggregate CNS Fails Positions. For a Member that is
rated 5 or 6 on the CRRM, the CNS Fails Charge is 10% of the
Member's aggregate CNS Fails Positions. For a Member that is rated 7
on the CRRM, the CNS Fails Charge is 20% of the Member's aggregate
CNS Fails Positions. See supra note 10.
---------------------------------------------------------------------------
III. Description of the Proposed Rule Change
NSCC is proposing to amend the provisions of the Rules regarding
the CNS Fails Charge by (i) discontinuing the application of the CNS
Fails Charge on Long Positions, and (ii) eliminating the CRRM from the
calculation and instead assessing the charge based on the duration that
the failed Short Positions remain outstanding, as discussed below.
First, the Proposed Rule Change would discontinue the application
of the CNS Fails Charge on failed Long Positions. CNS is a net flat
system and allocates shares received via an algorithm to those who are
set to receive.\13\ CNS can only allocate shares if a Member with a
Short Position makes the delivery into CNS on the Settlement Date.
Members have limited control whether they will receive shares from CNS
if the corresponding Members set to deliver do not deliver shares in
their entirety to CNS. NSCC states that, given this limited ability to
control if a Member is allocated shares that it is set to receive, it
is not appropriate to assess a CNS Fails Charge on Members who fail to
receive an allocation from CNS for a Long Position.\14\ Additionally,
NSCC states that CNS Fails Positions, including failed Long Positions,
are currently subject to NSCC's normal risk margining procedures, and
risk associated with these positions is accounted for in the existing
risk calculations.\15\ The Proposed Rule Change would revise the
definition of CNS Fails Position in Rule 1 to remove the reference to a
Long Position.
---------------------------------------------------------------------------
\13\ See Notice of Filing, supra note 3, 90 FR at 44736.
\14\ Id.
\15\ Id.
---------------------------------------------------------------------------
Second, the Proposed Rule Change would eliminate the use of the
CRRM from the CNS Fails Charge calculation, which currently uses a
percentage based on each Member's CRRM rating. NSCC states that the
risk posed from the fail to deliver is specific to the individual
position that is failing, and that a better measure of the risk related
to the CNS Fails Position is how long the position has been
outstanding.\16\ NSCC states that since the risk posed by the failed
position is less influenced by the Member that failed to make delivery,
the CNS Fails Charge should not be scaled to Member-specific criteria
such as CRRM.\17\ As such, NSCC is proposing to eliminate CRRM from the
charge calculation.
---------------------------------------------------------------------------
\16\ Id. at 44737.
\17\ Id.
---------------------------------------------------------------------------
Instead, the Proposed Rule Change would assess the CNS Fails Charge
based on the length of time a Member has been failing to deliver a
position. NSCC states that while its existing margin methodology
addresses position-specific risk from a failed position, a position
that a Member has failed to deliver for an extended period may be
indicative of additional risk associated with the position.\18\ NSCC
states that to encourage timely delivery of settlement
[[Page 55200]]
obligations and address this additional risk, it is proposing to assess
the Charge using a percentage ranging from 5% to 100% based on the
length of time the position remains outstanding.\19\
---------------------------------------------------------------------------
\18\ Id.
\19\ Id.
---------------------------------------------------------------------------
The percentages initially will be (i) 5% for CNS Fails Positions
that have remained outstanding 1 to 4 Business Days, (ii) 15% for CNS
Fails Positions that have remained outstanding 5 to 10 Business Days,
(iii) 20% for CNS Fails Positions that have remained outstanding 11 to
20 Business Days, and (iv) 100% for CNS Fails Positions that have
remained outstanding longer than 20 Business Days.\20\ NSCC states that
the proposed percentages are designed to provide a mechanism to reduce
fails and protect NSCC from potentially incurring higher costs in
sourcing the CNS Fails Positions in a Member default event, where the
haircut applied increases the longer the CNS Fails Position remains
outstanding.\21\ NSCC states that, in connection with its regular
assessment of its margining methodologies, NSCC will review the CNS
Fails Charge haircut percentages to determine the effects on the
Members and whether the percentages continue to be adequate.\22\
---------------------------------------------------------------------------
\20\ NSCC will post the applicable percentages for CNS Fails
Positions on its website and provide reports to Members detailing
their open positions, including their CNS Fails Positions and
associated CNS Fails Charges for each. See Notice of Filing, supra
note 3, 90 FR at 44737.
\21\ See Notice of Filing, supra note 3, 90 FR at 44737.
\22\ Id.
---------------------------------------------------------------------------
While short-term fails may reflect operational delays, extended
fails, especially those exceeding 20 Business Days, might signal a
reduced or impaired market liquidity that increases market price risk
to NSCC.\23\ NSCC states that it determined that the risk associated
with a failed position increases the longer it remains unsettled, and
as such, the proposed change is intended to reflect this elevated risk
exposure and ensure NSCC is adequately protected by discouraging
prolonged settlement failures and promoting market discipline.\24\
---------------------------------------------------------------------------
\23\ Id.
\24\ Id.
---------------------------------------------------------------------------
If a Member delivers a position for a CNS Fails Position in the
night cycle following the applicable settlement date, NSCC will account
for the delivery amount and offset the failed quantity by the quantity
delivered in the night cycle.\25\ Additionally, if a Member's start of
day position in a CUSIP that failed to be delivered the prior
settlement date is net long for the portion of that position settling
on the current business date, a fails charge will not be assessed.\26\
---------------------------------------------------------------------------
\25\ Id.
\26\ Id.
---------------------------------------------------------------------------
The Proposed Rule Change would amend Procedure XV, Section
I.(A)(1)(d) to remove the references to CRRM, and to provide that
Members will be charged percentages for CNS Fails Position ranging from
5% to 100% based on the number of Business Days that the CNS Fails
Positions have remained outstanding. The proposed changes would provide
that NSCC shall post the applicable percentages on the NSCC website,
and the percentages may be updated from time to time as announced by
Important Notice.
NSCC conducted an impact study of the proposed changes based on
data from January 2, 2024 through April 30, 2025 (``Impact
Study'').\27\ The Impact Study indicated that if the proposed changes
had been in place during the Impact Study period, the proposed changes
would have led to an aggregate reduction in CNS Fails Charges by
approximately 56.1%, or $238.5 million, primarily due to the removal of
the charge on Long Positions.\28\ NSCC observed a decrease of 16.9%, or
$35.6 million, in failure to deliver positions during the Impact Study,
primarily due to increases in the CNS Fails Charge on older CNS Fails
Positions which offset the reduction in charge on positions failing for
only a few days.\29\
---------------------------------------------------------------------------
\27\ As part of the Proposed Rule Change, NSCC filed, as Exhibit
3, the Impact Study. Pursuant to 17 CFR 240.24b-2, NSCC requested
confidential treatment of Exhibit 3.
\28\ See Notice of Filing, supra note 3, 90 FR at 44737.
\29\ Id. The Impact Study also revealed that NSCC-level backtest
coverage remained above 99%, and no Member level coverage fell below
99%, with the proposed changes. Id.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \30\ 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 rules and regulations thereunder applicable
to such organization. After careful review of 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) of the Act
\31\ and Rules 17ad-22(e)(4) and (6)(i) thereunder.\32\
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(b)(2)(C).
\31\ 15 U.S.C. 78q-1(b)(3)(F).
\32\ 17 CFR 240.17Ad-22(e)(4) and (6)(i).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to, among other things, promote the prompt
and accurate clearance and settlement of securities transactions, and
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible.\33\ The Proposed Rule Change is consistent with Section
17A(b)(3)(F) of the Act for the reasons stated below.
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
NSCC calculates and assesses the CNS Fails Charge from Members with
CNS Fails Positions to offset the risk exposures to NSCC and
incentivize Members to satisfy their obligations on Settlement Date, as
discussed in Part II. The Proposed Rule Change would align the
calculation and assessment of the Charge more appropriately and
accurately to the risk that CNS Fails Positions pose to NSCC, as
discussed in Part III. Specifically, the Proposed Rule Change would
discontinue the application of the Charge to Long Positions since
Members have limited control on whether they will receive shares from
CNS, and risk associated with these positions is already accounted for
in the existing risk calculations. Additionally, because the duration
that the position has been outstanding is more indicative of the risk
of the CNS Fails Position than a Member's CRRM rating, the Proposed
Rule Change would replace the CRRM criteria in the calculation of the
Charge with percentages based on how long the CNS Fails Position has
been outstanding. Thus, the Proposed Rule Change would result in a
calculation of the CNS Fails Charge that is more closely associated
with the risk specific to the individual position that is failing,
while also providing a greater incentive for Members to deliver on long
outstanding CNS Fails Positions. This more appropriate calculation and
assessment of a charge designed to mitigate NSCC's risk exposure from
CNS Fails Positions should help ensure that NSCC collects sufficient
margin to manage risk exposure from these positions. By helping NSCC to
collect sufficient margin, the Proposed Rule Change should better
ensure that, in the event of a Member default, NSCC's operation of its
critical clearance and settlement services would not be disrupted
because of insufficient financial resources. Accordingly, the Proposed
Rule Change should support
[[Page 55201]]
NSCC's ability to provide prompt and accurate clearance and settlement
of securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\34\
---------------------------------------------------------------------------
\34\ Id.
---------------------------------------------------------------------------
Additionally, the Proposed Rule Change would help NSCC collect
sufficient margin to cover potential losses in the event of a Member
default by calculating the CNS Fails Charge based on the duration of
the failed position, which, as discussed, may be indicative of
additional risk associated with the position. As discussed in Part III,
the Proposed Rule Change would assess the CNS Fails Charge using
percentages ranging from 5% to 100% based on how long the position has
been outstanding. NSCC states that these percentages are designed to
protect NSCC from potentially incurring higher costs in sourcing the
CNS Fails Positions in a Member default, where the haircut applied
increases the longer the CNS Fails Position remains outstanding.\35\ As
described in Section II above, NSCC would access the mutualized
Clearing Fund should a defaulted Member's own margin be insufficient to
satisfy losses to NSCC caused by the liquidation of that Member's
portfolio. Therefore, by helping to ensure that NSCC has collected
sufficient margin from Members, the Proposed Rule Change would minimize
the likelihood that NSCC would have to access the Clearing Fund,
thereby limiting non-defaulting Members' exposure to mutualized losses.
By helping manage NSCC's risk exposure when a Member defaults, thus
limiting the exposure of NSCC's non-defaulting members to mutualized
losses, the Proposed Rule Change should help NSCC assure the
safeguarding of securities and funds which are in its custody or
control, consistent with Section 17A(b)(3)(F) of the Act.\36\
---------------------------------------------------------------------------
\35\ See Notice of Filing, supra note 3, 90 FR at 44737.
\36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17ad-22(e)(4)
Rule 17Ad-22(e)(4) requires that, among other things, NSCC
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor and manage its credit exposures to participants and those
exposures arising from its payment, clearing and settlement
processes.\37\
---------------------------------------------------------------------------
\37\ 17 CFR 240.17ad-22(e)(4).
---------------------------------------------------------------------------
As discussed in Part II, NSCC assesses the CNS Fails Charge on
Members with CNS Fails Positions in order to reduce credit exposures to
NSCC resulting from those positions by obtaining from such Members
financial resources commensurate with those credit exposures. To
support this, the Proposed Rule Change aims to produce a more
appropriate and accurate assessment and calculation of CNS Fails Charge
based on the risk exposure to NSCC. The Proposed Rule Change would
discontinue application of the Charge for Long Positions, since Members
have limited control on the ability to receive shares from CNS, and
risk associated with these positions is adequately accounted for in the
existing risk calculations. Additionally, by replacing the CRRM
criteria with percentages based on the age of the CNS Fails Positions,
the Proposed Rule Change would lead to more accurate calculation of the
CNS Fails Charge because the risk associated with the fail to deliver
is specific to the individual position that is failing. By helping
provide a more appropriate and accurate calculation and assessment of a
charge designed to mitigate NSCC's risk exposure from CNS Fails
Positions, the Proposed Rule Change should support NSCC's ability to
manage its credit exposures, consistent with Rule 17ad-22(e)(4) under
the Act.\38\
---------------------------------------------------------------------------
\38\ 17 CFR 240.17ad-22(e)(4).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(6)(i)
Rule 17Ad-22(e)(6)(i) requires that, among other things, 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.\39\
---------------------------------------------------------------------------
\39\ 17 CFR 240.17ad-22(e)(6)(i).
---------------------------------------------------------------------------
As discussed above, the CNS Fails Charge is designed to cover
NSCC's credit exposures to Members with CNS Fails Positions. The
Proposed Rule Change would align the calculation and assessment of the
Charge more closely to the risk that CNS Fails Positions pose to NSCC,
by discontinuing application of the Charge to failed Long Positions for
which Members have limited control and replacing the Member specific
criteria in calculating the Charge with position specific one that is
more indicative of the risk of the failed positions. Therefore, the
Proposed Rule Change would help produce a more appropriate calculation
of the Charge and therefore better cover NSCC's credit exposures to its
Members, consistent with the requirements of Rule 17ad-22(e)(6)(i).\40\
---------------------------------------------------------------------------
\40\ Id.
---------------------------------------------------------------------------
V. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A of the Act \41\
and the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\42\ that proposed rule change SR-NSCC-2025-013, be, and hereby is,
approved.\43\
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78s(b)(2).
\43\ In approving the Proposed Rule Change, the Commission
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
---------------------------------------------------------------------------
\44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-21645 Filed 11-28-25; 8:45 am]
BILLING CODE 8011-01-P