[Federal Register Volume 77, Number 68 (Monday, April 9, 2012)]
[Notices]
[Pages 21123-21125]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8463]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66731; File No. SR-NSCC-2012-02]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Enhance Its
Margining Methodology as Applied to Municipal and Corporate Bonds
April 4, 2012.
I. Introduction
On February 1, 2012, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change SR-NSCC-2012-02 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\
The proposed rule change was published for comment in the Federal
Register on February 22, 2012.\2\ The Commission received no comment
letters. For the reasons discussed below,
[[Page 21124]]
the Commission is granting approval of the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 34-66398 (February 15,
2012), 77 FR 10589 (February 22, 2012).
---------------------------------------------------------------------------
II. Description
This rule change will enhance NSCC's margining methodology as it
applies to municipal and corporate bonds
Proposal Overview
A primary objective of NSCC's clearing fund (``Clearing Fund'') is
to have on deposit from each applicable member assets sufficient to
satisfy losses that may otherwise be incurred by NSCC as the result of
the default of the member and the resultant close out of that member's
unsettled positions under NSCC's trade guaranty. Each member's Clearing
Fund required deposit is calculated daily pursuant to a formula set
forth in Procedure XV of NSCC's Rules, which formula is designed to
provide sufficient funds to cover this risk of loss. The Clearing Fund
formula accounts for a variety of risk factors through the application
of a number of components, each described in Procedure XV.\3\
---------------------------------------------------------------------------
\3\ In addition to those described in this filing, Clearing Fund
components also include (i) a mark-to-market component that takes
into account the difference between the contract price and market
price for the net position of each security in a member's portfolio
through settlement; (ii) the Market Maker Domination component
(``MMDOM'') is charged to Market Makers or firms that clear for
them; (iii) a ``special charge'' in view of price fluctuations in or
volatility or lack of liquidity of any security; (iv) an additional
charge between 5-10% of a member's outstanding fail positions; (v) a
``specified activity charge'' for transactions scheduled to settle
on a shortened settlement cycle (i.e., less than T+3 or T+3 for
``as-of'' transactions); (vi) an additional charge that NSCC may
require of members on surveillance status; and (vii) an ``Excess
Capital Premium'' that takes into account the degree to which a
member's collateral requirement compares to the member's excess net
capital by applying a charge if a member's Required Deposit minus
amounts applied from the charges described in (ii) and (iii) above
is above its required capital.
---------------------------------------------------------------------------
The volatility component or ``VaR'' is a core component of this
formula and is designed to calculate the amount of money that may be
lost on a portfolio over a given period of time and that is assumed
would be necessary to liquidate the portfolio within a given level of
confidence. Pursuant to Procedure XV, NSCC may exclude from this
calculation net unsettled positions in classes of securities such as
illiquid municipal or corporate bonds, whose volatility is amenable to
generally accepted statistical analysis only in a complex manner. The
volatility charge for such positions is determined by multiplying the
absolute value of the positions by a predetermined percentage
(``haircut''), which shall not be less than 2%.
In connection with its ongoing review of the adequacy and
appropriateness of its margining methodologies, NSCC is amending
Procedure XV of its Rules so that NSCC will apply this haircut-based
margining methodology at a rate of no less than 2% as is currently
permitted by Procedure XV to all municipal and corporate bonds
processed through NSCC. The proposed rule change will make clear that
to the extent NSCC deems appropriate NSCC may apply this haircut to any
of the municipal and corporate bonds that it processes. As NSCC
continues its ongoing review of the adequacy of its margining
methodology in achieving the desired coverage, the proposed rule change
will allow NSCC to apply a margin requirement to these instruments that
it deems appropriate.
NSCC reviews its risk management processes against applicable
regulatory and industry standards, including, but not limited to: (i)
The Recommendations for Central Counterparties (``Recommendations'') of
the Committee on Payment and Settlement Systems and the Technical
Committee of the International Organization of Securities Commissions
(``IOSCO'') and (ii) the securities laws and rulemaking promulgated by
the Commission. In conformance with Recommendations 3 and 4 of the
IOSCO Recommendations and with the Commission rules proposed under the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,
specifically proposed Rule 17Ad-22(b)(1) addressing measurement and
management of credit exposures, this proposed rule change will assist
NSCC in its continuous efforts to ensure the reliability of its
margining methodology and will limit NSCC's exposures to losses by
allowing NSCC to apply a margin requirement to the corporate and
municipal bonds it clears that captures the risk characteristics, which
are asset class specific, of these instruments, including historical
price volatility, market liquidity, and idiosyncratic risk.
Implementation Timeframe
Members will be advised of the implementation date through issuance
of an NSCC Important Notice.
Proposed Rule Changes
In order to make clear that to the extent NSCC deems appropriate it
may apply a haircut-based margining methodology to all municipal and
corporate bonds processed at NSCC, NSCC is amending Sections
I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of Procedure XV, as marked on Exhibit
5 to the proposed rule filing, by removing the qualifier ``illiquid''
before ``municipal or corporate bonds.'' No other changes to the Rules
are contemplated by this proposed rule change.
III. Discussion
Section 17A(b)(3)(F) of the Act \4\ requires, among other things,
that the rules of a clearing agency be designed, to assure the
safeguarding of securities and funds which are in the custody or
control of such clearing agency or for which it is responsible and in
general to protect investors and the public interest.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As a central counterparty, NSCC occupies an important role in the
securities settlement system by interposing itself between
counterparties to financial transactions, thereby reducing the risk
faced by members and contributing to global financial stability. The
effectiveness of a central counterparty's risk controls and the
adequacy of its financial resources are critical to achieving these
risk-reducing goals. Because the proposed rule change will assist NSCC
in its continuous efforts to ensure the reliability of its margining
methodology and will limit NSCC's exposures to losses by allowing it to
apply a margin requirement to corporate and municipal bonds cleared at
NSCC that better addresses the risk characteristics of these
instruments, the proposed rule change should help assure the
safeguarding of securities and funds which are in the custody or
control of NSCC or for which it is responsible, and in general, protect
investors and the public interest and therefore is consistent with the
requirements of Section 17A(b)(3)(F) of the Act. The proposed rule
change is not inconsistent with the existing rules of NSCC, including
any other rules proposed to be amended.
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \5\ and the
rules and regulations thereunder.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\6\ that the proposed rule change (File No. SR-NSCC-2012-02) be,
and hereby is, approved.\7\
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78s(b)(2).
\7\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\8\ 17 CFR 200.30-3(a)(12).
[[Page 21125]]
---------------------------------------------------------------------------
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\8\
Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-8463 Filed 4-6-12; 8:45 am]
BILLING CODE 8011-01-P