[Federal Register Volume 80, Number 180 (Thursday, September 17, 2015)]
[Notices]
[Pages 55883-55885]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-23283]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75899; File No. SR-NSCC-2015-803])
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Advance Notice To Enhance NSCC's
Margining Methodology as Applied to Family-Issued Securities of Certain
NSCC Members
September 11, 2015.
Pursuant to section 806(e)(1) of title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 \1\ (``Clearing
Supervision Act'') and Rule 19b-4(n)(1)(i) \2\ under the Securities
Exchange Act of 1934 (``Act''), notice is hereby given that on August
14, 2015, National Securities Clearing Corporation (``NSCC'') filed
with the Securities and Exchange Commission (``Commission'') the
advance notice SR-NSCC-2015-803 (``Advance Notice'') as described in
Items I and II below, which Items have been prepared by NSCC.\3\ The
Commission is publishing this notice to solicit comments on the Advance
Notice from interested persons.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ On August 14, 2015, NSCC filed this Advance Notice as a
proposed rule change (SR-NSCC-2015-003) with the Commission pursuant
to section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4,
17 CFR 240.19b-4. A copy of the proposed rule change is available at
http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This Advance Notice consists of amendments to NSCC's Rules &
Procedures (``Rules'') in order to enhance NSCC's margining methodology
as applied to family-issued
[[Page 55884]]
securities of those NSCC Members \4\ that are placed on NSCC's ``Watch
List'', i.e. those Member [sic] who present a heightened credit risk to
NSCC or have demonstrated higher risk related to their ability to meet
settlement, as more fully described below.
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\4\ Terms not defined herein are defined in the Rules, available
at http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, NSCC included statements
concerning the purpose of and basis for the Advance Notice 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 and B
below, of the most significant aspects of such statements.
(A) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants, or Others
In November 2013, NSCC engaged in outreach to its Members by
providing those Members with a description of the proposal and the
results of an impact study showing the potential impact of this
proposal on Members' Clearing Fund required deposits. NSCC did not
receive any written comments relating to this proposal in response to
this outreach. NSCC will notify the Commission of any written comments
received by NSCC.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment,
Clearing and Settlement Supervision Act
Description of Change
NSCC is proposing to enhance its margin methodology as applied to
the family-issued securities of its Members that are on its Watch List
\5\ by excluding these securities from the volatility component, or
``VaR'' charge, and then charging an amount calculated by multiplying
the absolute value of the long net unsettled positions in that Member's
family-issued securities by a percentage that is no less than 40%. The
haircut rate to be charged would be determined based on the Member's
rating on the credit risk rating matrix and the type of family-issued
security submitted to NSCC. Fixed income securities that are family-
issued securities would be charged a haircut rate of no less than 80%
for firms that are rated 6 or 7 on the credit risk rating matrix, and
no less than 40% for firms that are rated 5 on the credit risk rating
matrix; and equity securities that are family-issued securities would
be charged a haircut rate of 100% for firms that are rated 6 or 7 on
the credit risk rating matrix, and no less than 50% for firms that are
rated 5 on the credit risk rating matrix. NSCC would have the authority
to adjust these haircut rates from time to time within these parameters
as described in Procedure XV of NSCC's Rules without filing a proposed
rule change with the Commission pursuant to section 19(b)(1) of the
Act,\6\ and the rules thereunder, or an advance notice with the
Commission pursuant to section 806(e)(1) of the Clearing Supervision
Act,\7\ and the rules thereunder.
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\5\ As part of its ongoing monitoring of its membership, NSCC
utilizes an internal credit risk rating matrix to rate its risk
exposures to its Members based on a scale from 1 (the strongest) to
7 (the weakest). Members that fall within the higher risk rating
categories (i.e. 5, 6, and 7) are considered on NSCC's ``Watch
List'', and may be subject to enhanced surveillance or additional
margin charges, as permitted under NSCC's Rules. See Section 4 of
Rule 2B and section I(B)(1) of Procedure XV of NSCC's Rules, supra
Note 1 [sic].
\6\ 15 U.S.C. 78s(b)(1).
\7\ 12 U.S.C. 5465(e)(1).
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Anticipated Effect on and Management of Risk
As a central counterparty, NSCC occupies an important role in the
securities settlement system by interposing itself between
counterparties to financial transactions and thereby reducing the risk
faced by participants 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. In that context, NSCC continuously reviews its
margining methodology in order to ensure the reliability of its
margining in achieving the desired coverage. In order to be most
effective, NSCC must take into consideration the risk characteristics
specific to certain securities when margining those securities.
Among the various risks that NSCC considers when evaluating the
effectiveness of its margining methodology are its counterparty risks
and identification and mitigation of ``wrong-way'' risk, particularly
specific wrong-way risk, defined as the risk that an exposure to a
counterparty is highly likely to increase when the creditworthiness of
that counterparty deteriorates.\8\ NSCC has identified an exposure to
wrong-way risk when it acts as central counterparty to a Member with
respect to positions in securities that are issued by that Member or
that Member's affiliate. These positions are referred to as ``family-
issued securities.'' In the event that a Member with unsettled long
positions in family-issued securities defaults, NSCC would close out
those positions following a likely drop in the credit-worthiness of the
issuer, possibly resulting in a loss to NSCC.
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\8\ See Principles for financial market infrastructures, issued
by the Committee on Payment and Settlement Systems and the Technical
Committee of the International Organization of Securities
Commissions 47 n.65 (April 2012), available at http://www.bis.org/publ/cpss101a.pdf.
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Therefore, the overall impact of NSCC's proposal, as described
above, on risks presented by NSCC would be to reduce NSCC's exposure to
this type of wrong-way risk by enhancing its margin methodology as
applied to the family-issued securities of its Members that are on its
Watch List, and present a heightened credit risk to the clearing agency
or have demonstrated higher risk related to their ability to meet
settlement. NSCC believes a reduction in its exposures to wrong-way
risk through a margining methodology that more effectively capture
[sic] the risk characteristics of these positions would contribute to
the goal of maintaining financial stability in the event of a Member
default and reduce systemic risk overall. Because NSCC Members that are
on its Watch List present a heightened credit risk to the clearing
agency or have demonstrated higher risk related to their ability to
meet settlement, NSCC believes that this charge would more effectively
capture the risk characteristics of these positions and can help
mitigate NSCC's exposure to wrong-way risk.
NSCC will continue to evaluate its exposures to wrong-way risk,
specifically wrong-way risk presented by family-issued securities,
including by reviewing the impact of expanding the application of the
proposed margining methodology to the family-issued securities of those
Members that are not on the Watch List. NSCC is proposing to apply the
enhanced margining methodology to the family-issued securities of
Members that are on the Watch List at this time because, as stated
above, these Members present a heightened credit risk to the clearing
agency or have demonstrated higher risk related to their ability to
meet settlement. As such, there is a clear and more urgent need to
address NSCC's exposure to wrong-way risk presented by these firms'
family-issued securities. However, any future change to the margining
methodology as applied to the family-issued securities of Members
[[Page 55885]]
that are not on the Watch List would be subject to a separate proposed
rule change pursuant to section 19(b)(1) of the Act,\9\ and the rules
thereunder and an advance notice pursuant to section 806(e)(1) of the
Clearing Supervision Act,\10\ and the rules thereunder.
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\9\ 15 U.S.C. 78s(b)(1).
\10\ 12 U.S.C. 5465(e)(1).
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Consistency with the Clearing Supervision Act. The objectives and
principles of section 805(b)(1) of the Clearing Supervision Act specify
the promotion of robust risk management, promotion of safety and
soundness, reduction of systemic risks and support of the stability of
the broader financial system.\11\ Rule 17Ad-22(b)(1), promulgated under
the Act, requires NSCC to measure its credit exposures to its
participants at least once a day and limit its exposures to potential
losses from defaults by its participants under normal market conditions
so that the operations of the clearing agency would not be disrupted
and non-defaulting participants would not be exposed to losses that
they cannot anticipate or control.\12\ Rule 17Ad-22(b)(2), promulgated
under the Act, requires NSCC to use risk-based models for setting
margin requirements.\13\
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\11\ 12 U.S.C. 5464(b)(1).
\12\ 17 CFR 240.17Ad-22(b)(1).
\13\ 17 CFR 240.17Ad-22(b)(2).
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By enhancing the margin methodology as applied to the family-issued
securities of its Members that are on its Watch List the proposal would
assist NSCC in collecting margin that more accurately reflects the risk
characteristics of these securities, thereby limiting NSCC's exposures
to potential losses from defaults by these Members under normal market
conditions. By more closely capturing the risk characteristics of these
positions, the proposed enhancement to the margining methodology would
also assist NSCC in its continuous efforts to ensure the reliability
and effectiveness of its risk-based margining methodology. In this way,
the proposal would help NSCC, as a central counterparty, maintain
effective risk controls, contributing to the goal of maintaining
financial stability in the event of a Member default. Therefore, NSCC
believes the proposal is consistent with the requirements of section
805(b)(1) of the Clearing Supervision Act and Rule 17Ad-22(b)(1) and
(2), promulgated under the Act, cited above.
III. Date of Effectiveness of the Advance Notice, and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. NSCC shall not implement the proposed change if the
Commission has any objection to the proposed change.
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 NSCC with prompt written notice of the
extension. The proposed change may be implemented in less than 60 days
from the date the Advance Notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies NSCC in writing that it does not object to the proposed change
and authorizes NSCC to implement the proposed change on an earlier
date, subject to any conditions imposed by the Commission.
NSCC 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 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 Number SR-NSCC-2015-803 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSCC-2015-803. 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 that are filed
with the Commission, and all written communications relating to the
Advance Notice 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 the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's Web site
(http://dtcc.com/legal/sec-rule-filings.aspx). 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 Number SR-NSCC-2015-803 and should be submitted on
or before October 8, 2015.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-23283 Filed 9-16-15; 8:45 am]
BILLING CODE 8011-01-P