[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62893-62896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24678]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70689; File No. SR-NSCC-2013-802]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing Amendment No. 3 to Advance Notice, as
Previously Modified by Amendment Nos. 1 and 2, To Institute
Supplemental Liquidity Deposits to Its Clearing Fund Designed To
Increase Liquidity Resources To Meet Its Liquidity Needs
October 15, 2013.
On March 21, 2013, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') advance notice SR-NSCC-2013-802 (``Advance Notice'')
pursuant to Section 806(e)(1) of the Payment, Clearing, and Settlement
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule
19b-4(n)(1)(i) \2\ thereunder.\3\ On April 19, 2013, NSCC filed with
the Commission Amendment No. 1 to the Advance Notice, which the
Commission published for comment in the Federal Register on May 1,
2013.\4\ On May 20, 2013, the Commission extended the period of review
of the Advance Notice, as modified by Amendment No. 1.\5\ On June 11,
2013, NSCC filed with the Commission Amendment No. 2 to the Advance
Notice, as previously modified by Amendment No. 1, which the Commission
published for comment in the Federal Register on July 15, 2013.\6\ As
of October 15, 2013, the Commission had received 22 comment letters on
the proposal contained in the Advance Notice and its related Proposed
Rule Change,\7\ including NSCC's two responses to the comment letters
received as of August 20, 2013.\8\
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ NSCC also filed the proposal contained in the Advance Notice
as proposed rule change SR-NSCC-2013-02 (``Proposed Rule Change'')
under Section 19(b)(1) of the Securities and Exchange Act of 1934
(``Exchange Act'') and Rule 19b-4 thereunder. Release No. 34-69313
(Apr. 4, 2013), 78 FR 21487 (Apr. 10, 2013). On April 19, 2013, NSCC
filed Amendment No. 1 to the Proposed Rule Change, which, on May 22,
2013, the Commission published notice of and designated a longer
period of review for Commission action on the Proposed Rule Change,
as modified by Amendment No. 1. Release No. 34-69620 (May 22, 2013),
78 FR 32292 (May 29, 2013). On June 11, 2013, NSCC filed Amendment
No. 2 to the Proposed Rule Change, which the Commission published
notice of with an order instituting proceedings to determine whether
to approve or disapprove the Proposed Rule Change (``Order
Instituting Proceedings''). Release No. 34-69951 (Jul. 9, 2013), 78
FR 42140 (Jul. 15, 2013). On September 25, 2013, the Commission
designated a longer period of review for Commission action on the
Order Instituting Proceedings. Release No. 34-70501 (Sep. 25, 2013),
78 FR 60347 (Oct. 1, 2013). On October 7, 2013, NSCC filed Amendment
No. 3 to the Proposed Rule Change, of which the Commission published
notice. Release No. 34-70688 (Oct. 15, 2013). The proposal in the
Advance Notice, as amended, and the Proposed Rule Change, as
amended, shall not take effect until all regulatory actions required
with respect to the proposal are completed.
\4\ Release No. 34-69451 (Apr. 25, 2013), 78 FR 25496 (May 1,
2013).
\5\ Release No. 34-69605 (May 20, 2013), 78 FR 31616 (May 24,
2013).
\6\ Release No. 34-69954 (Jul. 9, 2013), 78 FR 42127 (Jul. 15,
2013).
\7\ 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 Advance Notice was also filed as
a Proposed Rule Change, see Release No. 34-69313, supra note 3, the
Commission is considering all public comments received on the
proposal regardless of whether the comments are submitted to the
Advance Notice, as amended, or the Proposed Rule Change, as amended.
\8\ NSCC also received a comment letter directly prior to filing
the Advance Notice and related Proposed Rule Change with the
Commission, which NSCC provided to the Commission in Amendment No. 1
to the filings. See Exhibit 2 to File No. SR-NSCC-2013-802 (http://sec.gov/rules/sro/nscc/2013/34-69451-ex2.pdf).
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[[Page 62894]]
Pursuant to Section 806(e)(1) of the Clearing Supervision Act \9\
and Rule 19b-4(n)(1)(i) \10\ thereunder, notice is hereby given that on
October 4, 2013, NSCC filed with the Commission Amendment No. 3 to the
Advance Notice, as previously modified by Amendment Nos. 1 and 2, as
described in Item I, II and III below, which Items have been prepared
primarily by NSCC. The Commission is publishing this notice to solicit
comments on the Advance Notice, as modified by Amendment No. 3, from
interested persons.\11\
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\9\ 12 U.S.C. 5465(e)(1).
\10\ 17 CFR 240.19b-4(n)(1)(i).
\11\ Defined terms that are not defined in this notice are
defined in Amended Exhibit 5 to the Advance Notice, available at
http://sec.gov/rules/sro/nscc.shtml, under File No. SR-NSCC-2013-
802, Additional Materials.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
The Advance Notice, as modified by Amendments No. 1, No. 2, and No.
3, is a proposal by NSCC to amend its Rules & Procedures (the ``NSCC
Rules'') to provide for supplemental liquidity deposits to its Clearing
Fund (the ``NSCC Clearing Fund'') to ensure that NSCC has adequate
liquidity resources to meet its liquidity needs (the ``SLD Proposal''
or sometimes the ``Proposal''), as described below. NSCC filed
Amendment No. 3 (this ``Amendment'') to the Advance Notice, as
previously modified by Amendment No. 1 and No. 2, in order to delete
the provisions in the proposed Rule relating to Regular Activity
Liquidity Obligations (as defined), to respond to concerns raised by
Members. As a result the Proposal, as revised, would impose
supplemental liquidity obligations on affected Members only with
respect to activity relating to monthly options expiry periods (defined
in the proposed Rule as ``Special Activity Liquidity Obligations'').
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, NSCC included statements
concerning the purpose of and basis for the Advance Notice, as modified
by Amendment No. 3, and discussed any comments it received on the
Advance Notice. The text of these statements may be examined at the
places specified in Item IV below. NSCC has prepared summaries, set
forth in sections A, B, and C below, of the most significant aspects of
such statements.
(A) Advance Notice Filed Pursuant to Section 806(e) of the Payment,
Clearing and Settlement Supervision Act
1. Description of Change
Existing Proposal
As noted in the original proposal contained in the Advance Notice,
as modified by Amendments No. 1 and No. 2, the SLD Proposal would
modify the NSCC Rules to add a new Rule 4(A), 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
monthly options expiration dates (``Options Expiration Activity
Periods'').
Under the existing Proposal, the Liquidity Obligation of a Member
or Affiliated Family with respect to a Regular Activity Period (a
``Regular Activity Liquidity Obligation'') or an Options Expiration
Activity Period (a ``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 (that is, over a period from date of
default through the following three settlement days), based upon an
historical look-back period. The calculations for both the Regular
Activity Liquidity Obligation and the Special Activity Liquidity
Obligation were designed so that NSCC has adequate liquidity resources
to enable it to settle transactions, notwithstanding the default of one
of these 30 largest Members or Affiliated Families during Regular
Activity Periods, as well as during Options Expiration Activity
Periods. The 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. The Regular Activity Liquidity Obligation of an
Unaffiliated Member or Affiliated Family that has a Regular Activity
Liquidity Obligation (a Regular Activity Liquidity Provider) is
satisfied by such Regular Activity Liquidity Provider making a Regular
Activity Supplemental Deposit to the Clearing Fund in the amount of its
Regular Activity Liquidity Obligation, offset by (i) the total amount
(if any) if its commitment and the commitment of its ``Designated
Lender'' under NSCC's committed line of credit (the ``Credit
Facility'') and (ii) a share of the unallocated commitments of other
lenders under the Credit Facility.
The cash deposit in respect of a Special Activity Liquidity
Obligation (a ``Special Activity Supplemental Deposit'') is structured
in the existing SLD Proposal to address any additional liquidity
shortfalls (over and above NSCC's other available liquidity resources)
that arise during the heightened activity period around monthly options
expiration. 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.
Objections From Commenters
The key concerns raised by commenters with respect to the existing
SLD Proposal were as follows:
First, commenters claimed that Members were not sufficiently
consulted or involved during the development of the Proposal (even
though NSCC management conducted significant Member outreach), so that
the Proposal lacked input that could have potentially resulted in a
less burdensome approach.
Second, commenters claimed that the Proposal was anticompetitive or
discriminatory because the obligation to provide supplemental liquidity
was imposed on only the 30 largest Unaffiliated Members or Affiliated
Families (even though those Members collectively represent
approximately 85% of NSCC's total membership by peak liquidity needs),
rather than all Members of NSCC. This concern was raised in the context
of Regular Activity Supplemental Deposits.
Third, commenters claimed that the existing Proposal was
anticompetitive or discriminatory because, with respect to Regular
Activity Supplemental Deposits, it gave a dollar for dollar credit for
commitments made by Regular Activity Liquidity Providers or their
Designated Lenders under the Credit Facility--supposedly favoring
Regular Activity Liquidity Providers with affiliated banks.
NSCC believes that the proposed amendments and items described
below address or mitigate all of these concerns.
Proposed Amendments
NSCC is proposing to amend the existing SLD Proposal by removing
those provisions that, collectively, deal with the imposition of
Regular Activity Liquidity Obligations, while
[[Page 62895]]
maintaining the provisions relating to Special Activity Liquidity
Obligations. The proposed Rule, as so revised, would thus impose only
Special Activity Liquidity Obligations with respect to the heightened
activity of Options Expiration Activity Periods (that is, the four days
beginning with the Friday that precedes the monthly expiration date for
stock options, and ending on the third settlement day following). Under
the revised Proposal, as under the existing Proposal as it relates to
Special Activity Liquidity Obligations, only those Unaffiliated Members
or Affiliated Families among the top 30 whose activity during monthly
Options Expiration Activity Periods generate liquidity needs in excess
of NSCC's then available liquidity resources will be obligated to fund
such additional amounts. That is, the allocation formula ratably
applies the additional amount needed during the relevant Options
Expiration Activity Period based upon the affected Member's Special
Activity Peak Liquidity Exposure. To the extent that a Member's Special
Activity Peak Liquidity Exposure is less than or equal to NSCC's then
available liquidity resources, its share of the Special Activity Peak
Liquidity Need will be zero.
In addition, under the revised SLD Proposal, as under the existing
Proposal as it relates to Special Activity Liquidity Obligations,
Unaffiliated Members and Affiliated Families, will be able to manage
their exposures by making Special Activities Prefund Deposits where
they project their own activity will increase their liquidity exposure.
For example, if a Special Activity Liquidity Provider anticipates that
its Special Activity Peak Liquidity Exposure at any time during a
particular Options Expiration Activity Period will be greater than the
amount calculated by NSCC, it can make an additional cash deposit to
the Clearing Fund (in excess of its Required Deposit) that it
designates as a ``Special Activity Prefund Deposit.'' However, to the
extent that a Member fails to adequately prefund its activity, it may
be subject to a Special Activity Liquidity Call in the same manner as
provided in the existing Proposal.
With these changes, NSCC is removing those provisions of the
existing SLD Proposal that generated most concern from commenters,
while retaining those provisions that enable NSCC to collect additional
liquidity resources to cover the heightened liquidity needs that arise
during monthly Options Expiration Activity Periods. Every Unaffiliated
Member and Affiliated Family among the top 30 whose activity causes a
liquidity need in excess of NSCC's available liquidity resources will
contribute ratably to such shortfall, so the Proposal fairly and
equitably apportions the obligation among those Unaffiliated Members
and Affiliated Families whose activity cause the need. The removal of
those provisions relating to how commitments under the Credit Facility
would be credited against the cash deposit obligations of Regular
Activity Liquidity Providers render concerns about such allocation
moot.
As indicated in NSCC's August 20, 2013 letter to the Commission,
DTCC is separately establishing a standing member-based advisory group,
the Clearing Agency Liquidity Council (``CALC''), as a forum for the
discussion of liquidity and liquidity-related financing needs and
trends. The CALC will initially focus on liquidity initiatives
currently being considered by NSCC to address liquidity funding during
periods of normal activity, including issues raised by commenters on
the existing SLD Proposal. In response to commenters' more general
concerns regarding NSCC's reliance on the Credit Facility and related
refinancing risk, NSCC will review with the CALC the financing options
available to NSCC to supplement the Clearing Fund as a liquidity
resource, and the related costs of those options. Any new initiatives
proposed as a result of the CALC review that require regulatory
approval will be addressed in a separate filing.
Reporting. As noted in the previous amendment to the Advance
Notice, NSCC agrees that Members have to be able to plan for their
liquidity obligations. At the same time, NSCC also believes it is
critical that Members understand the risks that their own activity
presents to NSCC, and be prepared to monitor their activity and alter
their behavior if they want to minimize the liquidity risk they present
to NSCC. Accordingly, NSCC will make available to each Member a daily
report showing the amount of liquidity NSCC would need in the event of
the default of such Member. Separately, NSCC will provide, and continue
to discuss with Special Activity Liquidity Providers, the reports
regarding their Special Activity Liquidity Obligations as currently
provided in the proposed Rule.
Finally, the amendment makes certain technical corrections and
clarifies the time period for when Special Activity Liquidity Calls
must be satisfied.
Implementation Timeframe. The SLD Proposal will be implemented on
February 1, 2014. As a result, the first time that Members will be
obligated to fund any Special Activity Supplemental Deposits will be
for the Options Expiration Activity Period in February 2014. NSCC Risk
staff will provide to affected Members their Special Activity Peak
Liquidity Exposures for the relevant Special Activity Lookback Period
by no later than January 15, 2014.
2. Anticipated Effect on Management of Risk
As described in above, NSCC is proposing to amend the Advance
Notice to address concerns raised by commenters, by removing provisions
relating to Regular Activity Liquidity Obligations, while maintaining
provisions relating to Special Activity Liquidity Obligations. NSCC
believes that the SLD Proposal, as amended hereby, has been designed to
mitigate any unintended impact on competition that may have been
perceived by the existing SLD Proposal, while ameliorating liquidity
risk by providing NSCC with a mechanism to cover peak liquidity needs
relating to options expiry periods.
(B) Comments on Competition
NSCC believes that the revised SLD Proposal will not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Securities and Exchange Act of 1934,
as amended (``Exchange Act''). The Special Activity Liquidity
Obligations imposed on Special Activity Liquidity Providers will ensure
that all Unaffiliated Members and Affiliated Families whose activity
present liquidity exposure to NSCC during periods of heightened
activity during Options Expiration Activity Periods fairly and
equitably contribute to NSCC's liquidity resources for settlement. NSCC
believes the changes that have been made to the existing Proposal fully
address the concerns raised by commenters, and eliminate any impact
that the SLD Proposal might have on competition. To the extent there
remains any perceived burden on competition caused by the Proposal,
NSCC believes that such burden is not unreasonable or inappropriate to
prevent systemic risk given that the Proposal contributes to the goal
of financial stability in the event of Member default.
(C) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants, or Others
Written comments on the Advance Notice, including NSCC's formal
response to the written comments, have
[[Page 62896]]
been filed with the Commission and are available on the Commission's
Web site.
III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The clearing agency may implement the proposed change pursuant to
Section 806(e)(1)(G) of the Clearing Supervision Act \12\ if it has not
received an objection to the proposed change within 60 days of the
later of (i) the date that the Commission received the advance notice
or (ii) the date the Commission receives any further information it
requested for consideration of the notice. The clearing agency shall
not implement the proposed change if the Commission has any objection
to the proposed change.
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\12\ 12 U.S.C. 5465(e)(1)(G).
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The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date of receipt of the advance notice, or the date the
Commission receives any further information it requested, if the
Commission notifies the clearing agency in writing that it does not
object to the proposed change and authorizes the clearing agency to
implement the proposed change on an earlier date, subject to any
conditions imposed by the Commission. The clearing agency shall post
notice on its Web site of proposed changes that are implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the Advance
Notice, as modified by Amendment No. 3, is consistent with the Clearing
Supervision 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 No. SR-NSCC-2013-802 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-2013-802. 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 Advance Notice, as amended, that
are filed with the Commission, and all written communications relating
to the Advance Notice, 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-2013-802 and should be submitted on or before November 5, 2013.
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24678 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P