[Federal Register Volume 77, Number 68 (Monday, April 9, 2012)]
[Pages 21123-21125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8463]



[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]