[Federal Register Volume 78, Number 135 (Monday, July 15, 2013)]
[Notices]
[Pages 42140-42147]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-16819]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69951; File No. SR-NSCC-2013-02]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing Amendment No. 2 and Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change, as Previously Modified by Amendment No. 1, To Institute 
Supplemental Liquidity Deposits to Its Clearing Fund Designed To 
Increase Liquidity Resources To Meet Its Liquidity Needs

July 9, 2013.
    On March 21, 2013, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2013-02 (``Proposed Rule 
Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Exchange Act'') \1\ and Rule 19b-4 thereunder.\2\ The 
Proposed Rule Change was published for comment in the Federal Register 
on

[[Page 42141]]

April 10, 2013.\3\ On April 19, 2013, NSCC filed with the Commission 
Amendment No. 1 to the Proposed Rule Change, which, on May 29, 2013, 
the Commission published for comment in the Federal Register and 
designated a longer period for Commission action on the Proposed Rule 
Change, as amended.\4\ As of July 9, 2013, the Commission had received 
fourteen comment letters on the proposal contained in the Proposed Rule 
Change and its related Advance Notice,\5\ including NSCC's response to 
the comment letters received as of June 10, 2013.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4. NSCC also filed the proposal contained in 
the Proposed Rule Change as advance notice SR-NSCC-2013-802 
(``Advance Notice''), as modified by Amendment No. 1, pursuant to 
Section 806(e)(1) of the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') and Rule 19b-
4(n)(1)(i) thereunder. See Release No. 34-69451 (Apr. 25, 2013), 78 
FR 25496 (May 1, 2013). On May 20, 2013, the Commission extended the 
period of review of the Advance Notice, as modified by Amendment No. 
1. Release No. 34-69605 (May 20, 2013), 78 FR 31616 (May 24, 2013). 
On June 11, 2013, NSCC filed Amendment No. 2 to the Advance Notice, 
as previously modified by Amendment No.1. Absent a request by the 
Commission to NSCC to provide additional information on the Advance 
Notice, as amended, pursuant to Section 806(e)(1)(D) of the Clearing 
Supervision Act, see 12 U.S.C. 5465(e)(1)(D), the Commission shall 
have until July 19, 2013 to issue an objection or non-objection to 
the Advance Notice, as amended. See Release No. 34-69605 (May 20, 
2013), 78 FR 31616 (May 24, 2013), and see 12 U.S.C. 5465(e)(1)(E) 
and (G). The proposal in the Proposed Rule Change, as amended, and 
the Advance Notice, as amended, shall not take effect until all 
regulatory actions required with respect to the proposal are 
completed.
    \3\ Release No. 34-69313 (Apr. 4, 2013), 78 FR 21487 (Apr. 10, 
2013).
    \4\ See Release No. 34-69620 (May 22, 2013), 78 FR 32292 (May 
29, 2013).
    \5\ See Comments Received on File Nos. SR-NSCC-2013-02 (http://sec.gov/comments/sr-nscc-2013-02/nscc201302.shtml) and SR-NSCC-2013-
802 (http://sec.gov/comments/sr-nscc-2013-802/nscc2013802.shtml). 
Since the proposal contained in the Proposed Rule Change was also 
filed as an Advance Notice, see Release No. 34-69451, supra note 2, 
the Commission is considering all public comments received on the 
proposal regardless of whether the comments are submitted to the 
Proposed Rule Change, as amended, or the Advance Notice, as amended.
    \6\ NSCC also received a comment letter directly prior to filing 
the Proposed Rule Change and related Advance Notice with the 
Commission, which NSCC provided to the Commission in Amendment No. 1 
to the filings. See Exhibit 2 to File No. SR-NSCC-2013-02 (http://sec.gov/rules/sro/nscc/2013/34-69620-ex2.pdf).
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    Pursuant to Section 19(b)(1) of the Exchange Act \7\ and Rule 19b-4 
thereunder,\8\ notice is hereby given that on June 11, 2013, NSCC filed 
with the Commission Amendment No. 2 to the Proposed Rule Change, as 
previously modified by Amendment No. 1. The Commission is publishing 
this notice to solicit comments on the Proposed Rule Change, as 
modified by Amendment No. 2, from interested persons.\9\
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    \7\ 15 U.S.C. 78s(b)(1).
    \8\ 17 CFR 240.19b-4.
    \9\ Defined terms that are not defined in this notice are 
defined in Amended Exhibit 5 to the Proposed Rule Change, available 
at http://sec.gov/rules/sro/nscc.shtml, under File No. SR-NSCC-2013-
02, Additional Materials.
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    Additionally, this order institutes proceedings under Section 
19(b)(2)(B) of the Exchange Act \10\ to determine whether to approve or 
disapprove the Proposed Rule Change, as discussed in Section IV, below. 
The institution of proceedings does not indicate that the Commission 
has reached any conclusions with respect to any of the issues involved, 
nor does it mean that the Commission will ultimately disapprove the 
Proposed Rule Change. Rather, as described in Section III, below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the Proposed Rule Change to inform the 
Commission's analysis of whether to approve or disapprove the Proposed 
Rule Change.
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    \10\ 15 U.S.C. 78s(b)(2)(B).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The Proposed Rule Change, as modified by Amendment No. 2, is a 
proposal by NSCC to amend its Rules and Procedures (``Rules'') to 
provide for a supplemental liquidity funding obligation (``SLD 
Proposal''), as described below. NSCC filed Amendment No. 2 to the 
Proposed Rule Change, as previously modified by Amendment No. 1, in 
order to mitigate potential cash outlay burdens, respond to 
transparency concerns raised by NSCC members (``Members''), clarify the 
implementation timeframe, and describe the reports that would be 
provided to Members so that they can anticipate their supplemental 
liquidity obligations to NSCC under the SLD Proposal (``Supplemental 
Liquidity Obligations'').

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, NSCC included statements 
concerning the purpose of and basis for the Proposed Rule Change, as 
modified by Amendment No. 2, and discussed any comments it received on 
the Proposed Rule Change, as amended. The text of these statements may 
be examined at the places specified in Item V below. NSCC has prepared 
summaries, set forth in sections (A), (B), and (C) immediately below, 
of the most significant aspects of these statements.\11\
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    \11\ The Commission has modified the text of the summaries 
prepared by NSCC to primarily focus on the Proposed Rule Change.
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(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Description of Change
Original SLD Proposal
    The original proposal contained in the Proposed Rule Change, as 
modified by Amendment No. 1 (``Original SLD Proposal''), would change 
the Rules to add a new Rule 4A, in order to establish a supplemental 
liquidity funding obligation designed to cover the liquidity exposure 
attributable to those Members and families of affiliated Members 
(``Affiliated Families'') that regularly incur the largest gross 
settlement debits over a settlement cycle during both times of normal 
trading activity (``Regular Activity Periods'') and times of increased 
trading and settlement activity that arise around quarterly triple 
options expiration dates (``Quarterly Options Expiration Activity 
Periods'').
    The Supplemental Liquidity Obligation of a Member or Affiliated 
Family with respect to a Regular Activity Period (``Regular Activity 
Liquidity Obligation'') or a Quarterly Options Expiration Activity 
Period (``Special Activity Liquidity Obligation'') would be imposed on 
the 30 Members or Affiliated Families who generate the largest 
aggregate liquidity needs over a settlement cycle that would apply in 
the event of a closeout (i.e., over a period from date of default 
through the following three settlement days), based upon a historical 
look-back period.
    NSCC states that the calculations for both the Regular Activity 
Liquidity Obligation and the Special Activity Liquidity Obligation are 
designed so that NSCC has adequate liquidity resources to enable it to 
settle transactions, notwithstanding the default of the Member or 
Affiliated Family presenting the largest liquidity need during Regular 
Activity Periods, as well as during Quarterly Options Expiration 
Activity Periods. The Supplemental Liquidity Obligations imposed on 
Members of Affiliated Families would be apportioned among the Members 
in that Affiliated Family in proportion to the liquidity risk (or peak 
exposure) they present to NSCC.
    NSCC states that the SLD Proposal is designed to supplement NSCC's 
liquidity resources and work in tandem with NSCC's committed credit 
facility (``Credit Facility''), which it maintains as a liquidity 
resource (in addition to the NSCC Clearing Fund) should a Member or 
Affiliated Family default. The Regular Activity Liquidity Obligations 
would be calculated and imposed semi-annually, the first of which would 
be made to coincide with the annual renewal of the Credit Facility and 
the second of which would be made six months thereafter. NSCC states 
that the SLD Proposal seeks to strike a balance between reliance on the 
Credit Facility to reduce the burden on Members or Affiliated Families 
for cash outlay, while at the same time obligating those Members or 
Affiliated Families who expose NSCC to the largest liquidity risks to 
fund their fair share of the liquidity ``differential.''
    NSCC states that the SLD Proposal contains both obligations and 
incentives. For example, a cash deposit in respect of a Regular 
Activity Liquidity Obligation (e.g., in the Original SLD Proposal, the 
obligation of

[[Page 42142]]

a Member or Affiliated Family to make a ``Regular Activity Supplemental 
Deposit'') would be reduced by any liquidity such Members or their 
affiliates provided as commitments under the Credit Facility. To the 
extent that NSCC is successful in raising significant amounts of its 
needed liquidity though the Credit Facility--whether from Members, 
their affiliates making commitments on their behalf, or non-affiliated 
lenders--NSCC states that a diversified lender facility serves to 
mitigate the liquidity risk of NSCC and its membership as a whole, 
while reducing the cash outlay obligations of the top 30 Members and 
Affiliated Families.
    NSCC states that the cash deposit in respect of a Special Activity 
Liquidity Obligation (``Special Activity Supplemental Deposit'') was 
structured in the Original SLD Proposal to address any additional 
liquidity shortfalls (i.e., over and above NCSS's other available 
liquidity resources) that arose during the heightened trading activity 
around the Quarterly Options Expiration Period. As such, these 
additional Special Activity Supplemental Deposits would be required to 
be maintained on deposit with NSCC only through the completion of the 
related settlement cycle and for a few days thereafter.
    Both prior to the submission of the Proposed Rule Change, and 
since, NSCC states that it has engaged in significant outreach to its 
Members to discuss the SLD Proposal, which outreach, NSCC believes, has 
been key to the development and evolution of the SLD Proposal over the 
past 18 months. NSCC is cognizant of the concerns raised by Members who 
have submitted comments regarding the Proposed Rule Change and related 
Advance Notice, and, according to NSCC, this Amendment No. 2 seeks to 
address those concerns.
Proposed Enhancements to the Original SLD Proposal
    NSCC is proposing to amend the Original SLD Proposal with 
enhancements that NSCC believes are collectively designed to mitigate 
potential cash outlay burdens, as well as respond to transparency 
concerns raised by Members, by clarifying the implementation timeframe 
of the proposed change and the reporting that would be provided to 
Members under this revised SLD Proposal (``Revised SLD Proposal'').
    First, NSCC would allow its Members to designate a commercial 
lender--whether or not affiliated with that Member--to commit as a 
lender to the Credit Facility as a designee of the Member, subject to 
satisfaction of reasonable lender criteria.\12\ NSCC states that this 
commitment would reduce the Member's Regular Activity Liquidity 
Obligation cash requirement by the amount of any such commitment. 
Therefore, under the Revised SLD Proposal, NSCC states that all 
Members, whether or not they have affiliated banks, are equally 
incentivized to seek lenders to maximize the size of the Credit 
Facility. NSCC states that this change effectively eliminates any 
perceived discrimination in the Original SLD Proposal between those 
Members that have bank affiliates and those that do not. This change is 
reflected in the proposed Rule 4A by the inclusion of a new definition 
for ``Designated Lender,'' and corresponding adjustments to the 
calculation formula.
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    \12\ NSSC states that such criteria would be designed to cover 
issues such as credit risk, concentration risk, and lender 
diversity, so as to ensure the continued robust viability of the 
line of credit.
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    Second, any ``excess'' Credit Facility commitments made by Members 
directly or through their Designated Lenders (i.e., the amount of any 
commitment by a Member or its Designated Lender that exceeds the 
Member's calculated Regular Activity Liquidity Obligation) would be 
allocated ratably among all Regular Activity Liquidity Providers, which 
NSCC states would reduce their cash Regular Activity Supplemental 
Deposit requirements, in the same way that commitments of non-
affiliated lenders are applied under the Original SLD Proposal. This 
change is reflected in adjustments to the calculation formula in 
Sections 5 and 9 of the proposed Rule 4A.
    Third, under the Revised SLD Proposal, the seasonal/peak facility 
that NSCC believes currently addresses NSCC's liquidity needs over 
Quarterly Options Expiration Activity Periods would be extended to 
cover monthly options expiration periods and would be calculated and 
collected 12 times a year instead of four (``Monthly Options Expiration 
Activity Period''). NSCC states, based on its review of available 
historical quantitative information, that the effect of this change 
would be to reduce the size of the Regular Activity Liquidity 
Obligations under the Revised SLD Proposal. Additionally, NSCC states 
that by treating all liquidity obligations derived from Monthly Options 
Expiration Activity Periods (where there is greater activity 
fluctuation than during other periods) as Special Activity Liquidity 
Obligations, the Revised SLD Proposal would provide greater stability 
and predictability to the size of the Regular Activity Liquidity 
Obligations. NSCC's analyses based upon historical data estimates that 
expanding this seasonal/peak facility to cover all Monthly Options 
Expiration Activity Periods could reduce the size of the aggregate 
Regular Activity Liquidity Obligations by up to 20 percent. NSCC also 
states that recalibrating the Special Activity Liquidity Obligations on 
a monthly basis results in allocating the liquidity burdens among those 
Members and Affiliated Families more equitably, since only those 
Members whose monthly options-related activity generate liquidity needs 
in excess of NSCC's then available liquidity resources would be 
obligated to fund such additional amounts.\13\ NSCC states that this 
change is reflected in a revised definition of ``Options Expiration 
Activity Period,'' and clarifications to the calculation formula of the 
Special Activity Liquidity Obligations, as well as to related 
definitions to ensure the formula--and the allocation among affected 
Members--operates as intended.
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    \13\ NSCC states that since the allocation formula ratably 
applies the excess amount needed due to activity during Special 
Activity Periods based upon the affected Member's Special Activity 
Peak Liquidity Exposure, then to the extent that a Member's Special 
Activity Peak Liquidity Exposure (as defined) is less than or equal 
to NSCC's other available resources, that Member's share of the 
Special Activity Peak Liquidity Need will be zero.
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    Fourth, the Revised SLD Proposal includes a new definition for 
``Other Qualifying Liquid Resources.'' NSCC states that this new 
defined term would permit NSCC to take any such additional or 
alternative liquidity resources that it may obtain in the future into 
account when calculating Regular Activity Liquidity Obligations and to 
use them to reduce the amount of cash, if any, that Members would 
otherwise be obligated to deposit as Regular Activity Supplemental 
Deposits. This change is reflected both with the inclusion of the new 
definition of ``Other Qualifying Liquid Resources,'' and with 
corresponding modifications to the calculation formula.
    Fifth, as regards Members' voluntarily prefunding Regular Activity 
Liquidity Obligations and Special Activity Liquidity Obligations, NSCC 
would monitor Members' prefunding activity to understand the impact 
such prefunded amounts have on the amount of its committed liquidity 
resources. NSCC states that the Revised SLD Proposal provides NSCC with 
some discretion when including prefunded deposits within its calculated 
liquidity resources, so as to provide some

[[Page 42143]]

flexibility in the event it becomes too reliant on voluntary prefunding 
to meet its minimum liquidity needs. NSCC states that this change to 
the Original SLD Proposal would address any concern that NSCC would not 
have sufficient liquid resources to effect settlement if prefunding is 
unavailable when actually needed.
Additional Revisions to the Original SLD Proposal
    Reporting. NSCC states that it understands and agrees that Members 
have to be able to evaluate risks of their membership and be able to 
plan for their liquidity obligations. NSCC also states that it is 
critical that Members understand the risks that their own activity 
presents to NSCC and be prepared to monitor their own activity and 
alter their behavior if they want to minimize the liquidity risk they 
present to NSCC. While NSCC states that robust reporting has always 
been a key element of the Original SLD Proposal, the Revised SLD 
Proposal clarifies in a new Section 31 of proposed Rule 4A the 
information that NSCC would provide to Members. Such information would 
be provided to all Members, not just the top 30 Members and Affiliated 
Families, at least monthly. NSCC states that these reports would show 
Members the liquidity exposure they present to NSCC to enable them to 
monitor their activity and the ``Regular Activity Peak Liquidity 
Exposure'' that results from their activity. Information provided in 
these reports would include:
     The Regular Activity Peak Liquidity Exposure of the Member 
on each Business Day of the preceding month;
     NSCC's largest Regular Activity Peak Liquidity Need for 
the preceding month;
     in the case of an Unaffiliated Member, for each Business 
Day of the preceding month, the percentage that the Regular Activity 
Peak Liquidity Exposure of the Member bears to the aggregate Regular 
Activity Peak Liquidity Exposures of all Regular Activity Liquidity 
Providers (the percentage for a Member that is not a Regular Activity 
Liquidity Provider for that month would be zero); and
     in the case of an Affiliated Family, for each Business Day 
of the preceding month, the percentage that the aggregate Regular 
Activity Peak Liquidity Exposures of all Members of that Affiliated 
Family bears to the aggregate Regular Activity Peak Liquidity Exposures 
of all Regular Activity Liquidity Providers (Affiliated Families that 
are not Regular Activity Liquidity Providers for that month would be 
zero percentage).
    Technical Clarifications and Changes. The Revised SLD Proposal 
includes certain technical changes and clarifications that NSCC states 
it designed to align notice, payment, and cash return timeframes, and 
to clarify the operation of the calculation formulas to ensure they 
operate as intended.
    Implementation Timeframe and Funding Notice. While the SLD Proposal 
would be effective upon the completion of all required regulatory 
approvals, Members would not be obligated to fund their Regular 
Activity Liquidity Obligations or Special Activity Liquidity 
Obligations until the Monthly Options Expiration Activity Period in 
September 2013. Moreover, Members would be provided with notice of 
their initial Regular Activity Liquidity Obligations no later than 30 
days prior to the date on which that amount must be deposited with 
NSCC. At that time, NSCC's risk management staff would also provide to 
affected Members their Special Activity Peak Liquidity Exposure within 
the look-back period. Specific implementation dates would be provided 
by NSCC by Important Notice.
    NSCC states that its risk management staff would continue to work 
with Members to help them understand the Revised SLD Proposal and to 
develop tools that NSCC believes would enable Members to forecast the 
liquidity exposure they present to NSCC. NSCC states that its risk 
management staff would also use the reports that would be provided 
under new Section 31 or proposed Rule 4A to guide ongoing discussions 
with Members regarding the types of actions that could mitigate those 
Members' peak liquidity exposure. In addition, under the Revised SLD 
Proposal (as in the Original SLD Proposal), NSCC states that Members 
would be able to manage their exposures by making prefund deposits 
where they project their own activity would increase their liquidity 
exposure. For example, if a Member that would be a Special Activity 
Liquidity Provider anticipates that its Special Activity Peak Liquidity 
Exposure at any time during a particular Options Expiration Activity 
Period would be greater than the amount calculated by NSCC, then it 
could make an additional cash deposit to the Clearing Fund (in excess 
of its Required Deposit) that it designates as a ``Special Activity 
Prefund Deposit.''
    In order to give Members sufficient time to plan for annual Credit 
Facilities renewals and to line up designated liquidity providers for 
the Credit Facility, NSCC states that its risk staff would provide 
Members with an impact analysis of their projected Supplemental 
Liquidity Obligations beginning on November 31 of each year.\14\ NSCC 
states that the information provided would show the potential impact on 
affected Members based on different Credit Facility funding levels.
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    \14\ NSCC states that given the timing of the calculation look-
back periods, information provided in November will necessarily be 
estimates.
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    In response to the more general concern regarding refinancing risk 
and NSCC's reliance on the Credit Facility, NSCC states that it would 
continue to explore additional financing sources. NSCC states that it 
would review and evaluate the financing options available to it and the 
related costs of those options, and would expect to present the 
findings of that review to the NSCC Board prior to the next renewal of 
the Credit Facility in May 2014. When sizing and approving the fee and 
costs structure of the renewal Credit Facility, NSCC states that the 
NSCC Board would be able to take into account those potential 
additional financing sources and consider the consequent impact on 
Members' cash Regular Activity Supplemental Deposit and Special 
Activity Supplemental Deposit obligations. The items that would be 
included in this review are:
     analysis of the availability, size, cost, and credit risk 
necessary to obtain the additional commitments under the Credit 
Facility likely to reduce the Regular Activity Supplemental Deposit 
requirements to zero;
     analysis of the availability, size, cost, and credit risk 
to obtain a new multi-year committed facility to replace the existing 
Credit Facility;
     an understanding of the aggregate costs, if any, for 
Members to designate commercial lenders to commit to the Credit 
Facility as their designees;
     analysis of the availability, size, cost, and potential 
depth of a capital markets funding among Members and/or third parties 
as an additional liquidity resource, including the viability of 
offering the funding to Members or mandating their participation in 
such funding; and
     a summary of the steps that Members have taken to reduce 
their NSCC liquidity profile, and whether this should be factored into 
the historical analysis used to determine NSCC's Regular Activity 
Period liquidity needs and Members' share of that need.
    NSCC states that it would update its Members on the results of this 
review and the determination of the NSCC Board. NSCC states that it 
would also update its Members with information regarding future 
liquidity initiatives designed to increase NSCC's liquidity

[[Page 42144]]

resources and potentially reduce supplemental deposit requirements, 
including the rationale behind these initiatives, how these initiatives 
fit within NSCC's liquidity risk tolerance, and the likely impact of 
the initiatives.
2. Statutory Basis
    NSCC states that the Revised SLD Proposal contributes to NSCC's 
goal of ensuring that NSCC has adequate liquidity resources to meet its 
settlement obligations, notwithstanding the default of its Members or 
Affiliated Families that pose the largest aggregate liquidity exposure 
over the relevant settlement cycle, as required by Commission Rule 
17Ad-22(b)(3).\15\ As such, NSCC states the Revised SLD Proposal is 
consistent with the requirements of the Exchange Act, as amended, and 
the rules and regulations thereunder applicable to NSCC.
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    \15\ See 17 CFR 240.17Ad-22(b)(3).
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(B) Clearing Agency's Statement on Burden on Competition

1. Regulatory Requirements for Proposed Rule Changes
    Section 19(b)(2)(C)(i) of the Exchange Act provides that ``[t]he 
Commission shall 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 Exchange Act] and the rules and 
regulations issued under [the Exchange Act] that are applicable to such 
organizations.'' The requirements of the Exchange Act that are 
specifically applicable to clearing agencies are set forth in Section 
17A relating to a national system for the clearance and settlement of 
securities transactions. Section 17A(a)(2)(A) of the Exchange Act 
directs the Commission to facilitate the establishment of the national 
system, having due regard for inter alia the ``maintenance of fair 
competition among brokers and dealers, clearing agencies, and transfer 
agents.'' Section 17A(a)(3)(I) of the Exchange Act provides that a 
clearing agency shall not be registered unless the Commission 
determines inter alia that ``[t]he rules of the clearing agency do not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of [the Exchange Act].''
    Rule 19b-4(a)(i), promulgated by the Commission under Section 19(b) 
of the Exchange Act, provides that a proposed rule change by a self-
regulatory organization (which includes a registered clearing agency) 
shall be filed on Form 19b-4. The General Instructions for Form 19b-4 
prescribe the information to be included in the completed form. With 
respect to competition, the self-regulatory organization is required to 
``[s]tate whether the proposed rule change will have an impact on 
competition and, if so, (i) state whether the proposed rule change will 
impose any burden on competition or whether it will relieve any burden 
on, or otherwise promote, competition and (ii) specify the particular 
categories of persons and kinds of businesses on which any burden will 
be imposed and the ways in which the proposed rule change will affect 
them.'' The self-regulatory organization is further required to explain 
(i) why any impact on competition is not believed to be a significant 
burden on competition or (ii) why any burden on competition is 
necessary or appropriate in furtherance of the Exchange Act.
2. Position of NSCC as Utility for Securities Industry
    NSCC is an operating subsidiary of The Depository Trust & Clearing 
Corporation (``DTCC''), which NSCC states is a user-owned, user-
governed holding company for NSCC, two other registered clearing 
agencies, a derivatives clearing organization joint venture, and a 
number of other companies that provide a variety of post-trade 
processing and information services. NSCC states that it and the other 
registered clearing agencies in the DTCC group provide the critical 
infrastructure for the clearance and settlement of securities 
transactions in the United States. These registered clearing agencies 
operate as utilities for their users, allowing such users to compete 
against each other (for the benefit of their retail and institutional 
customers) on the basis of performance and price and not on the basis 
of any relative advantage with respect to clearing and settlement 
services.
    As a clearinghouse for securities transactions and a central 
counterparty, NSCC states that it has no reason, interest, or intent to 
discriminate among its Members--certainly not to give any of its 
Members a competitive advantage or impose on any of its Members a 
competitive disadvantage in their operations. NSCC states that although 
it strives for complete neutrality in its interface with Members, it 
may be that clearing agency rules of general application to all Members 
could have a disparate effect on Members with diverse business models 
and strategies. NSCC states that any such disparate effects arising out 
of choices made by individual Members in terms of their business models 
and strategies (including their relative levels of capitalization) 
should not be seen as due to action by the clearing agency having an 
impact or imposing a burden on competition.
    Although NSCC states that it is always mindful of the effect that 
its Rules may have on individual Members, NSCC states that it must also 
be concerned with (i) the interests of its membership as a whole, (ii) 
its general obligations under Section 17A(b)(3) of the Exchange Act 
``to facilitate the prompt and accurate clearance and settlement of 
securities transactions and derivatives agreements, contracts, and 
transactions'' and ``to safeguard securities and funds in its custody 
or control,'' and (iii) the particular requirements of Rule 17Ad-
22(b)(3) relating to the financial resources that a clearing agency 
which is a central counterparty (like NSCC) must maintain to cover the 
default of the participant family presenting the largest exposure to 
the clearing agency in extreme but plausible market conditions.
    NSCC states that these concerns and the interests of its Members, 
including their interests relating to issues of competition and the 
effect of the proposed change on competition among Members and between 
Members and other financial market participants, can be reconciled. 
But, NSCC states that individual Members that may be affected by the 
proposed change--designed to assure that NSCC has the liquidity it 
needs to safely operate a clearing and settlement business and meet its 
obligations as a registered clearing agency and central counterparty 
under the Exchange Act--must also recognize that some accommodation may 
be required on their part.
3. Modifications to the Proposed Change Address Competition Concerns
    In response to comments submitted on the proposed change in the 
form in which it was originally filed in the Proposed Rule Change, and 
dialogue with a number of other Members who did not submit comments but 
otherwise provided their input to NSCC, NSCC states that it has revised 
the proposed change in a number of respects that bear upon the issue of 
competition and whether the proposed change would have an impact or 
impose any burden on competition.
    First, the Original SLD Proposal provided that a Regular Activity 
Liquidity Provider would receive an offset against its Regular Activity 
Liquidity Obligation for the amount of its commitment and the 
commitment of any affiliate of the Regular Activity

[[Page 42145]]

Liquidity Provider under the Credit Facility. The Revised SLD Proposal 
provides that a Regular Activity Liquidity Provider would receive an 
offset against its Regular Activity Liquidity Obligation for the amount 
of its commitment, the commitment of any affiliate, and the commitment 
of any Designated Lender of the Regular Activity Liquidity Provider 
under the Credit Facility. As a result, NSCC states that any 
distinction between Members with bank affiliates and Members without 
bank affiliates, and any perceived advantage for Members with bank 
affiliates over Members without bank affiliates, has been eliminated.
    Second, the SLD Proposal has been refined to provide that a Regular 
Activity Liquidity Provider would receive an offset against its Regular 
Activity Liquidity Obligation for both (i) its pro rata share of the 
commitments of lenders under the Credit Facility that are not Members 
or their Designated Lenders and (ii) its pro rata share of the 
commitments of Members and their Designated Lenders above the amounts 
of their Regular Activity Liquidity Obligations. As a result of this 
change, NSCC states that the obligation of Regular Activity Liquidity 
Providers to provide Regular Activity Supplemental Deposits will be 
ratably reduced by the amount of such ``excess.''
    Third, the Options Expiration Activity Period has been redefined to 
mean the days around all monthly options expiration dates (12 per year) 
rather than just triple options expiration dates (four per year). As a 
result of this change, NSCC states that more periods of increased 
activity would be excluded by NSCC from the calculation of its Regular 
Activity Peak Liquidity Need, thereby reducing the Regular Activity 
Liquidity Obligations of Regular Activity Liquidity Providers.
    NSCC states that participation in the Credit Facility is available 
to financial institutions that have the resources and operational 
capabilities to be lenders under the Credit Facility, subject to 
satisfaction of reasonable lender criteria. Although the Credit 
Facility was renewed on May 14, 2013 for an additional term of 364 
days, NSCC states that there are mechanisms in the Credit Facility to 
increase the commitments of existing lenders and admit new lenders at 
any time during the term. Accordingly, NSCC states that at the time 
when the SLD Proposal becomes effective and before the time that any 
Member may have to satisfy a Regular Activity Liquidity Obligation, 
such Member would have an opportunity to either join the Credit 
Facility itself as a lender (if it has the authority to be a lender) or 
enter into arrangements with a bank to be its Designated Lender--in 
either case thereby reducing or eliminating the need for it to make a 
cash Regular Activity Supplemental Deposit to the Clearing Fund.
4. Competition Concerns Raised by Commenters
    Bank Affiliates. NSCC states that some commenters raised concerns 
on competition grounds that the Original SLD Proposal permitted Members 
and Affiliated Families with bank affiliates to reduce or potentially 
eliminate their required cash Required Activity Supplemental Deposits 
by the amounts of the commitments of such bank affiliates under the 
Credit Facility while Members and Affiliated Families without bank 
affiliates could not do so. As indicated above, NSCC states that this 
limitation to bank affiliates has been eliminated from the SLD 
Proposal. NSCC states that any Member or Affiliated Family could 
designate a Designated Lender and receive an offset for the commitment 
of such Designated Lender.
    The Top 30 Cut-Off. NSCC states that some commenters raised 
concerns on competition grounds that Supplemental Liquidity Obligations 
are only imposed on the 30 largest Members and Affiliated Families 
rather than on the entire membership. NSCC states that, based on an 
analysis of Members, NSCC made a business determination that the top 30 
Members or Affiliated Families would most appropriately capture the 
liquidity exposure over and above available NSCC Clearing Fund 
liquidity. NSCC states that its liquidity analyses show that the 
liquidity requirements attributable to the top 30 Members and 
Affiliated Families account for the vast majority of NSCC's liquidity 
needs. According to NSCC, as of the end of February 2013, the top 30 
Members and Affiliated Families represented approximately 85% of the 
total membership by peak liquidity needs over the prior six-month 
period. NSCC states that the analyses also show that the remaining 
membership's peak liquidity demands are covered by the required 
deposits to the NSCC Clearing Fund. Therefore, NSCC states the SLD 
Proposal appropriately places the burden of providing liquidity on 
those Members and Affiliated Families who present the largest liquidity 
risk. While NSCC does not believe it would be appropriate to require 
the entire membership to bear the burden of the liquidity needs that 
are generated by NSCC's largest trading firms, it does note that all 
Members currently do bear the cost of the Credit Facility as an 
operating expense that NSCC factors into its overall fee structure, as 
well as their share of the NSCC Clearing Fund. NSCC states that as a 
whole, NSCC believes this collective liquidity funding approach 
represents a fair apportionment of NSCC's aggregate liquidity needs 
amongst its membership.
    Impact on a Sector of the Market. NSCC states that some commenters 
raised concerns on competition grounds that the SLD Proposal may cause 
increased concentration of clearing activity by requiring smaller firms 
to clear through larger financial institutions. NSCC states that 
implicit in these comments is a concern that smaller, less well 
capitalized firms have less access to funding than do larger, well 
capitalized firms. NSCC states, however, that no Member, because of its 
low capital business model or limited access to funding, should have 
the right to impose on NSCC (and the rest of the membership) the burden 
of bearing the risks of that Member's clearing activities. Moreover, 
NSCC states that the SLD Proposal provides incentives for Members to 
manage the liquidity risks of their business; by doing so they could 
reduce the share of their obligation under the SLD Proposal.
    NSCC also states that some commenters claim that the risk posed by 
brokers with business in mostly agency-based transactions was 
overstated by NSCC in crafting the SLD Proposal because those firms 
settle transactions on a delivery-versus-payment (``DVP'') basis. NSCC 
states, however, that agency brokers that execute market transactions 
that clear at NSCC are obligated, as principals, to settle those 
transactions at NSCC irrespective of whether their institutional 
customers complete the institutional delivery DVP side of the 
transaction (which occurs outside of NSCC). According to NSCC, it, as 
the central counterparty, remains obligated to complete the other side 
of the market transaction if the agency broker fails. NSCC states that 
institutional customers of the agency brokers are not NSCC Members and 
have no contractual obligation with NSCC to complete those trades if 
the agency broker fails. Therefore, NSCC states that if an agency 
broker fails, NSCC (and its other Members) face the risk that the 
institutional customer will take its own market action, and NSCC will 
incur the liquidity obligation of completing the market settlement. 
NSCC states that it must consider this risk in crafting its risk 
management strategies, and agency brokers are not immune from the risk 
of failure, as recent events have shown that

[[Page 42146]]

they, like other firms, remain subject to market events, as well as 
technology and other risks.
    NSCC states that these comments raise a concern that Members are 
being asked share the burden of funding the liquidity needs that are 
dependent on the actions, including trading levels, of other Members, 
and thus the amounts are not within the contributing Member's control. 
NSCC states that from a fairness perspective, however, that 
proportionate share of the affected Member's liquidity burden (whether 
it be an agency broker or otherwise) would always be less than the 
Member's own peak liquidity needs, and each Member is in the best 
position to monitor and manage the liquidity risks presented by its own 
activity.
5. Impact on Competition
    NSCC states that for the reasons stated above, it believes the 
changes that have been made to the Original SLD Proposal eliminate or 
substantially ameliorate the impact that the SLD Proposal might have on 
competition, and that any perceived burden on competition caused by the 
SLD Proposal is necessary and appropriate in furtherance of the 
purposes of the Exchange Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    While written comments on the Proposed Rule Change, as modified by 
Amendment No. 2, were not solicited, as noted above, NSCC engaged 
significant outreach and discussion with affected Members in developing 
the SLD Proposal.
    Written comments on the Proposed Rule Change, as amended, have been 
filed with the Commission and are available on the Commission's Web 
site. NSCC states that this Amendment No. 2 addresses some of the 
issues raised by those comments. NSCC's formal response to the written 
comments has been submitted separately to the Commission in accordance 
with the process for submitting comments.

III. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-NSCC-2013-02 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \16\ to determine whether the Proposed 
Rule Change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the significant 
legal and policy issues raised by the Proposed Rule Change. As noted 
above, 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 
provide additional comment on the Proposed Rule Change, as amended, to 
inform the Commission's analysis of whether to approve or disapprove 
the Proposed Rule Change, as amended.
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    \16\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\17\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. In particular, Section 17A(b)(3)(F) of the Exchange Act 
requires that the rules of the clearing agency are not designed to 
permit unfair discrimination among participants in the use of the 
clearing agency.\18\ Here, the Commission believes that it is 
appropriate to solicit comment on whether Amendment No. 2 adequately 
addresses the concern raised by some commenters that the Proposed Rule 
Change could have a discriminatory impact on NSCC's non-bank affiliated 
Members who would be subject to the SLD Proposal but who do not 
currently participate in the Credit Facility.\19\
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    \17\ 15 U.S.C. 78s(b)(2)(B).
    \18\ See 15 U.S.C. 78q-1(b)(3)(F).
    \19\ See, e.g., comment letter from John C. Nagel, Managing 
Director and General Counsel, Citadel Securities, to Elizabeth 
Murphy, Secretary, Commission, dated June 13, 2013, at 7-8 (http://sec.gov/comments/sr-nscc-2013-02/nscc201302-14.pdf ).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the Proposed Rule 
Change, as amended, is consistent with the Section 17A \20\ or any 
other provision of the Exchange Act, or the rules and regulations 
thereunder. The Commission, in its sole discretion, may determine 
whether any issues relevant to approval or disapproval of the Proposed 
Rule Change would be facilitated by the opportunity for an oral 
presentation of views upon such a request.\21\
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    \20\ 15 U.S.C. 78q-1.
    \21\ See 17 CFR 201.700(c)(2). Section 19(b)(2) of the Exchange 
Act, as amended by the Securities Acts Amendments of 1975, Public 
Law 94-29, 89 Stat. 97 (1975), grants the Commission flexibility to 
determine what type of proceeding--either oral or notice and 
opportunity for written comments--is appropriate for consideration 
of a particular proposal by a self-regulatory organization. See 
Securities Acts Amendments of 1975, Report of the Senate Committee 
on Banking, Housing and Urban Affairs to Accompany S. 249, S. Rep. 
No. 75, 94th Cong., 1st Sess. 30 (1975).
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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 August 5, 2013. If NSCC chooses to file a rebuttal to 
any submission, it must file its rebuttal by August 20, 2013. 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 rule-comments@sec.gov. Please include 
File No. SR-NSCC-2013-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-NSCC-2013-02. 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 Web site (http://www.sec.gov/rules/sro.shtml 
). Copies of the submission, all subsequent amendments, all written 
statements with respect to the Proposed Rule Change, as amended, that 
are filed with the Commission, and all written communications relating 
to the Proposed Rule Change, as amended, 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 
Web site 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 such filings 
also will be available for inspection and copying at the principal 
office of NSCC and on NSCC's Web site at http://dtcc.com/legal/rule_filings/nscc/2013.php. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File No. SR-
NSCC-2013-02 and should be submitted on or before August 5, 2013. 
NSCC's rebuttal comments should be submitted by August 20, 2013.


[[Page 42147]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-16819 Filed 7-12-13; 8:45 am]
BILLING CODE 8011-01-P