[Federal Register Volume 85, Number 32 (Tuesday, February 18, 2020)]
[Notices]
[Pages 8978-8982]
[FR Doc No: 2020-03055]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88162; File No. SR-NSCC-2019-801]

Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of No Objection To Advance Notice To Enhance
National Securities Clearing Corporation's Haircut-Based Volatility
Charge Applicable to Municipal Bonds

February 11, 2020.
    On December 13, 2019, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') advance notice SR-NSCC-2019-801 (``Advance Notice'')
pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of
1934 (``Exchange Act'' \3\ to revise NSCC's methodology for calculating
margin amounts applicable to municipal bonds. The Advance Notice was
published for public comment in the Federal Register on January 14,
2020,\4\ and the Commission has received no comments regarding the
changes proposed in the Advance Notice.\5\ This publication serves as
notice of no objection to the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ Securities Exchange Act Release No. 87911 (January 8, 2020),
85 FR 2197 (January 14, 2020) (File No. SR-NSCC-2019-801) (``Notice
of Filing''). On December 13, 2019, NSCC also filed a related
proposed rule change (SR-NSCC-2019-004) with the Commission pursuant
to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder
(``Proposed Rule Change''). See 15 U.S.C. 78s(b)(1) and 17 CFR
240.19b-4 respectively. In the Proposed Rule Change, which was
published in the Federal Register on January 2, 2020, NSCC seeks
approval of proposed changes to its rules necessary to implement the
Advance Notice. Securities Exchange Act Release No. 87858 (December
26, 2019), 85 FR 149 (January 2, 2020). The comment period for the
related Proposed Rule Change filing closed on January 23, 2020, and
the Commission received no comments.
    \5\ As the proposal contained in the Advance Notice was also
filed as a proposed rule change, all public comments received on the
proposal are considered regardless of whether the comments are
submitted on the proposed rule change or the Advance Notice.
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I. The Advance Notice

    The proposals reflected in the Advance Notice would revise NSCC's
Rules and Procedures (``Rules'') \6\ to change the methodology NSCC
uses for calculating the haircut-based margin charge applicable to
municipal bonds.
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    \6\ Capitalized 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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A. Background

    NSCC provides clearing, settlement, risk management, central
counterparty services, and a guarantee of completion for virtually all
broker-to-broker trades involving equity securities, corporate and
municipal debt securities, and certain other securities. NSCC manages
its credit exposure to its members by determining an appropriate
Required Fund Deposit (i.e., margin) for each member.\7\ The aggregate
of all NSCC members' Required Fund Deposits (together with certain
other deposits required under the Rules) constitute NSCC's Clearing
Fund, which NSCC would access should a defaulting member's own Required
Fund Deposit be insufficient to satisfy losses to NSCC caused by the
liquidation of the defaulting member's portfolio.\8\ NSCC collects each
member's Required Fund Deposit to mitigate potential losses to NSCC
associated with the liquidation of the member's portfolio in the event
of the member's default.\9\
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    \7\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules (``Procedure XV''), supra
note 6.
    \8\ See id.
    \9\ The Rules identify when NSCC may cease to act for a member
and the types of actions NSCC may take. For example, NSCC may
suspend a firm's membership with NSCC or prohibit or limit a
member's access to NSCC's services in the event that member defaults
on a financial or other obligation to NSCC. See Rule 46
(Restrictions on Access to Services) of the Rules, supra note 6.
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    Each member's Required Fund Deposit consists of a number of
applicable components, which are calculated to address specific risks
that the member's portfolio presents to NSCC.\10\ Generally, the
largest component of a member's Required Fund Deposit is the volatility
component.\11\ The volatility component is designed to calculate the
potential losses on a portfolio over a given period of time assumed
necessary to liquidate the portfolio, within a 99% confidence level.
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    \10\ Procedure XV, supra note 6.
    \11\ See id.
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    The methodology for calculating the volatility component of the
Required Fund Deposit depends on the type of security.\12\
Specifically, for certain

securities, including municipal bonds, NSCC calculates a haircut-based
volatility component by multiplying the absolute value of a member's
positions in such securities by a certain percentage designated by
NSCC.\13\
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    \12\ For most securities (e.g., equity securities), NSCC
calculates the volatility component as the greater of (1) the larger
of two separate calculations that utilize a parametric Value at Risk
(``VaR'') model, (2) a gap risk measure calculation based on the
largest non-index position in a portfolio that exceeds a
concentration threshold, which addresses concentration risk that can
be present in a member's portfolio, and (3) a portfolio margin floor
calculation based on the market values of the long and short
positions in the portfolio, which addresses risks that might not be
adequately addressed with the other volatility component
calculations. See id.; see also Securities Exchange Act Release No.
82780 (February 26, 2018), 83 FR 9035 (March 2, 2018) (File No. SR-
NSCC-2017-808); Securities Exchange Act Release No. 82781 (February
26, 2018), 83 FR 9042 (March 2, 2018) (File No. SR-NSCC-2017-020).
    \13\ Procedure XV, supra note 6.
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    NSCC's current methodology for designating the percentages used in
calculating the haircut-based volatility component for municipal bonds
involves distinguishing between municipal bonds based on tenor (i.e.,
remaining time to maturity), municipal sector (e.g., general
obligation, transportation, healthcare, etc.), and credit rating.\14\
Pursuant to that methodology, NSCC assigns each tenor-based group a
percentage.\15\ For municipal bonds rated higher than BBB+, the tenor-
based percentage is the percentage NSCC uses to calculate the haircut-
based volatility component.\16\ However, for municipal bonds rated BBB+
or lower, NSCC multiplies the tenor-based percentage by a sector-based
risk factor, resulting in a larger percentage for the haircut.\17\ The
additional sector-based risk factors account for the variable risks
between municipal sectors associated with the various industries in
which the bonds are issued and the sources of bond repayment.\18\
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    \14\ Notice of Filing, supra note 4 at 2198.
    \15\ See id.
    \16\ For example, a $10MM short position in a municipal bond
rated above BBB+ with 3 years to maturity is subject to the 2-5
years tenor-based group haircut of 5%, which applies to the absolute
market value of the positions, resulting in a haircut-based
volatility component of $500,000. Notice of Filing, supra note 4 at
2198.
    \17\ For example, a $10MM short position in a healthcare sector
municipal bond rated BBB+ or lower with 3 years to maturity is
subject to the 2-5 years tenor-based group haircut (5%) multiplied
by the sector-based factor of 1.2, resulting in a 6% haircut-based
volatility component of $600,000. Notice of Filing, supra note 4 at
2198.
    \18\ See id.
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    In all cases, the percentage used to calculate the municipal bond
haircut-based volatility component is not less than 2%, regardless of a
municipal bond's credit rating.\19\
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    \19\ Procedure XV, supra note 6.
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B. New Changes to NSCC's Methodology for Calculating Municipal Bond
Haircut Percentages

    NSCC states that it regularly assesses its margining methodologies
to evaluate whether margin levels are commensurate with the particular
risk attributes of the various products, portfolios, and markets that
NSCC serves.\20\ NSCC further states that based on recent impact
studies, the margin levels generated from municipal bonds using the
current methodology exceed the levels necessary to mitigate the risk
associated with those securities.\21\ In the Advance Notice, NSCC
proposes to change the methodology for calculating the municipal bond
haircut-based volatility component so that the amount of margin NSCC
collects is more commensurate with the risk attributes of those
securities.
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    \20\ Notice of Filing, supra note 4 at 2198.
    \21\ As part of the Advance Notice, NSCC filed Exhibit 3--NSCC
Impact Studies, comparing the current and proposed methodologies.
Pursuant to 17 CFR 240.24b-2, NSCC requested confidential treatment
of Exhibit 3.
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    As proposed in the Advance Notice, NSCC would retain the current
provision that in all cases the percentage used to calculate the
municipal bond haircut-based volatility component is not less than 2%,
regardless of a municipal bond's credit rating. NSCC would also
continue to distinguish between municipal bonds based on tenor, credit
rating, and municipal sector. However, NSCC would calculate the haircut
percentages for various groups of municipal bonds based on the
historical returns of one or more benchmark indices over a look-back
period not shorter than 10 years, using a minimum 99% calibration
percentile.
    The proposal would change the manner in which NSCC addresses the
risk presented by lower-rated municipal bonds. Instead of the current
methodology's approach which applies a sector-based straight risk
factor to the tenor-based haircut, resulting in a larger haircut
percentage, the proposed approach would allow the calculation to be
more precisely tailored to the risks presented by particular municipal
bonds. Specifically, the new approach would base the haircut percentage
on the historical returns of one or more benchmark indices, such as
tenor-based indices, municipal bond sector-based indices, and high-
yield indices, over a look-back period of at least ten years and would
no longer use a sector-based straight risk factor for lower-rated
municipal bonds. This approach should allow NSCC to more accurately
calculate margin amounts appropriate for the risks presented by such
municipal bonds by allowing NSCC to take into account a broader range
of risk characteristics associated with municipal bonds. NSCC notes
that, based on recent impact studies comparing the current and proposed
methodologies, the proposed methodology would manage NSCC's applicable
risks well above the 99% confidence level, although it would generate
lower overall margin amounts.\22\
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    \22\ Notice of Filing, supra note 4 at 2199.
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    Under the proposal in the Advance Notice, NSCC states that for
municipal bonds rated higher than BBB+, NSCC would use a tenor-based
index as the applicable benchmark index.\23\ Specifically, NSCC would
use the percentage derived from the tenor-based index as the haircut
for the purpose of calculating the volatility component for municipal
bonds rated higher than BBB+.\24\ For municipal bonds rated BBB+ or
lower (or not rated), NSCC states that it would use a percentage that
is the highest of: (1) The applicable tenor-based index, (2) municipal
bond sector-based indices, and (3) a high-yield index. \25\ For all
municipal bonds, when deriving the haircut percentage from the
applicable indices, NSCC would use a look-back period of a 10 year
rolling window plus a 1-year ``worst case scenario'' stress period.\26\
NSCC would identify the largest 3-day price return movement (reflected
as a percentage) within the 99th percentile of all 3-day price return
movements during the look-back period. Additionally, NSCC proposes to
re-calibrate the municipal bond haircut percentages no less frequently
than annually.
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    \23\ Id.
    \24\ Id.
    \25\ Id.
    \26\ NSCC believes that a 10-year window plus 1-year stress
period would capture relevant data and cover sufficient market data
without diluting the ``tail'' with an abundance of data. NSCC
believes this look-back period is typically long enough to capture
at least two recent market cycles, whereas a longer look-back period
might ``flatten'' out the results because recent volatile periods
might be offset by non-volatile periods, making the more recent
volatility appear less significant. Notice of Filing, supra note 4
at 2199.
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    As proposed in the Advance Notice, NSCC would have the ability to
modify certain aspects of the application of the proposed methodology
consistent with NSCC's applicable governance procedures and based on
NSCC's determination that such modifications are necessary to manage
the applicable risks above the 99% confidence level. Specifically,
based on NSCC's regular review of its margin methodologies, NSCC would
be able to modify: The frequency of re-calibrating the municipal bond
haircut percentages; applicable benchmark indices and the applicable
period for the price return

used in the calculations; and the look-back period. NSCC states that
any such modifications would be subject to the governance procedures
applicable to all of NSCC's margin methodologies, as set forth in
NSCC's Clearing Agency Model Risk Management Framework, which the
Commission has approved.\27\
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    \27\ Id.; See also Securities Exchange Act Release No. 81485
(August 25, 2017), 82 FR 41433 (August 31, 2017) (File No. SR-NSCC-
2017-008); Securities Exchange Act Release No. 84458 (October 19,
2018), 83 FR 53925 (October 25, 2018) (File No. SR-NSCC-2018-009).
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    Finally, NSCC proposes a method to address extraordinary
circumstances in which a certain municipality or issuer may present
unique risks not otherwise captured by the proposed methodology's use
of a percentage derived from the maximum of the applicable tenor-based
index, municipal bond sector-based indices, and high-yield indices.\28\
In such scenarios, NSCC proposes to have the ability to use the highest
percentage generated for any municipal bond group when calculating the
haircut-based volatility component for municipal bonds issued by the
municipality or issuer presenting such unique risks.
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    \28\ For example, the market price risk for issues of a
municipality facing technical default following a natural disaster
may not be fully captured by the proposed methodology due to the
liquidity profile of municipal securities.
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II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: to mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for SIFMUs and
strengthening the liquidity of SIFMUs.\29\
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    \29\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\30\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a):\31\
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    \30\ 12 U.S.C. 5464(a)(2).
    \31\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among others areas.\32\
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    \32\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\33\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\34\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the proposal in the Advance
Notice is consistent with the objectives and principles described in
Section 805(b) of the Clearing Supervision Act,\35\ and in the Clearing
Agency Rules, in particular Rules 17Ad-22(e)(4) and (e)(6).\36\
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    \33\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). The Commission established an effective date of
December 12, 2016 and a compliance date of April 11, 2017 for the
Covered Clearing Agency Standards. NSCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5).
    \34\ 17 CFR 240.17Ad-22.
    \35\ 12 U.S.C. 5464(b).
    \36\ 17 CFR 240.17Ad-22(e)(4) and (e)(6).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the Advance Notice is consistent with
the stated objectives and principles of Section 805(b) of the Clearing
Supervision Act.
    As described above in Section I.A., NSCC's current methodology
calculates municipal bond haircut percentages using tenor-based
percentages and sector-based risk factors. NSCC states that the current
methodology generates margin amounts greater than necessary to mitigate
NSCC's risks associated with municipal bonds. NSCC proposes to replace
the current methodology with one that would calculate the haircut
percentages based on the historical returns of one or more benchmark
indices over a look-back period of not shorter than 10 years, using a
minimum 99% calibration percentile. These changes would result in
margin amounts that are more commensurate with the risk attributes of
municipal bonds, while still managing NSCC's applicable risks well
above the 99% confidence level.\37\ Accordingly, the Commission
believes that the proposed methodology for calculating municipal bond
haircut percentages would be consistent with promoting robust risk
management because the proposed methodology would enable NSCC to more
precisely manage the relevant risks than the current methodology.
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    \37\ Notice of Filing, supra note 4 at 2199.
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    Further, by helping to ensure that NSCC collects margin amounts
sufficient to manage NSCC's risks associated with municipal bonds, the
proposed methodology would help limit NSCC's exposure in the event of a
default of a member with positions in municipal bonds. Accordingly, the
Commission believes that the proposed methodology would be consistent
with promoting safety and soundness at NSCC.
    Finally, as noted above, NSCC states that based on recent impact
studies, while the proposed methodology would fully manage NSCC's
applicable risks well above the 99% confidence level, it would reduce
margin requirements for every NSCC member holding positions in
municipal bonds.\38\ The changes proposed in the Advance Notice would
therefore result in lower capital demands on such members, who could
benefit from having the ability to use their liquid resources for other
purposes, including handling market stress events, which could, in
turn, have beneficial implications for the stability of the broader
financial system. Accordingly, the Division believes that the proposed
methodology would be consistent with supporting the stability of the
financial system and reducing systemic risks.
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    \38\ Id.; Proposed Rule Change, supra note 4 at 154.
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    As described above in Section I.B., NSCC proposes to re-calibrate
the municipal bond haircut percentages no less frequently than
annually. Regular re-calibration of the municipal bond haircut
percentages is necessary to ensure that the relevant calculations and
resulting margin levels take into account any changes over time to the
risk attributes of municipal bonds. The Commission believes that the
proposal to re-calibrate the municipal bond haircut percentages no less
frequently than annually would be consistent with robust risk
management because it

would require NSCC to regularly review the municipal bond haircut
percentages to ensure that margin levels remain commensurate with the
particular risk attributes of municipal bonds. Additionally, by helping
to ensure that NSCC continues to collect margin amounts sufficient to
manage the risks associated with municipal bonds, NSCC's proposal to
re-calibrate the municipal bond haircut percentages no less frequently
than annually would help limit NSCC's exposure in the event of a
default of a member with positions in municipal bonds. Accordingly, the
Commission believes that NSCC's proposal to re-calibrate the municipal
bond haircut percentages no less frequently than annually would be
consistent with promoting safety and soundness at NSCC, which in turn
would support the stability of the broader financial system and reduce
systemic risks.
    As described above in Section I.B., a certain municipality or
issuer may present unique risks to NSCC not otherwise captured by the
proposed methodology's use of a percentage derived from the maximum of
the applicable tenor-based index, municipal bond sector-based indices,
and high-yield indices. In such scenarios, NSCC proposes to have the
ability to use the highest percentage generated for any municipal bond
group when calculating the haircut-based volatility component for
municipal bonds issued by the municipality or issuer presenting such
unique risks. The Commission believes the proposed discretion allowing
NSCC to apply the highest percentage to municipal bonds issued by a
municipality or issuer presenting unique risks would be consistent with
robust risk management by helping to ensure that NSCC collects
sufficient margin amounts with respect to such securities.
Additionally, by helping to ensure that NSCC collects sufficient margin
amounts with respect to municipal bonds issued by a municipality or
issuer presenting such unique risks, the proposed discretion could help
limit NSCC's exposure in the event of a default of a member with
positions in such municipal bonds. Accordingly, the Commission believes
that the proposed discretion allowing NSCC to apply the highest
percentage to municipal bonds issued by a municipality or issuer
presenting unique risks would be consistent with promoting safety and
soundness at NSCC, which in turn would support the stability of the
broader financial system and reduce systemic risks.

B. Consistency With Rule 17Ad-22(e)(4)(i)

    Rule 17Ad-22(e)(4)(i) requires that NSCC establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively identify, measure, monitor, and manage its
credit exposures to participants and those arising from its payment,
clearing, and settlement processes, including by maintaining sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence.\39\
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    \39\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above in Section I.B., NSCC proposes to replace the
current methodology for calculating municipal bond haircut percentages
with a methodology that would utilize the historical returns of one or
more benchmark indices over a look-back period of not shorter than 10
years, using a minimum 99% calibration percentile. These changes would
result in more precisely determined margin amounts, while still
managing NSCC's applicable risks well above the 99% confidence
level.\40\ Accordingly, the Commission believes that the proposed
methodology is consistent with Rule 17Ad-22(e)(4)(i) because it should
enable NSCC to effectively identify, measure, monitor, and manage its
credit exposures to members with positions in municipal bonds,
including by maintaining sufficient financial resources to cover NSCC's
credit exposure to such members fully with a high degree of
confidence.\41\
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    \40\ Notice of Filing, supra note 4 at 2199.
    \41\ Id.
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    As described above in Section I.B., NSCC proposes to re-calibrate
the municipal bond haircut percentages no less frequently than
annually. The proposal would require NSCC to regularly review the
municipal bond haircut percentages, thereby helping to ensure that the
haircut percentages and resulting margin levels take into account any
changes over time to the risk attributes of municipal bonds.
Accordingly, the Commission believes that the proposal to re-calibrate
the municipal bond haircut percentages no less frequently than annually
is consistent with Rule 17Ad-22(e)(4)(i) because it should allow NSCC
to effectively identify, measure, monitor, and manage its credit
exposures to members with positions in municipal bonds, including by
maintaining sufficient financial resources to cover NSCC's credit
exposure to such members fully with a high degree of confidence.\42\
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    \42\ Id.
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    As described above in Section I.B., NSCC proposes to have the
ability to use the highest percentage generated for any municipal bond
group when calculating the haircut-based volatility component for
municipal bonds issued by a municipality or issuer presenting unique
risks not otherwise captured by the calculations in the proposed
methodology. Such discretion should help ensure that NSCC collects
sufficient margin amounts with respect to those securities.
Accordingly, the Commission believes that the proposed ability to apply
the highest percentage to such municipal bonds is consistent with Rule
17Ad-22(e)(4)(i) because it should better enable NSCC to effectively
identify, measure, monitor, and manage its credit exposures to members
with positions in such municipal bonds, including by maintaining
sufficient financial resources to cover NSCC's credit exposure to such
members fully with a high degree of confidence.\43\
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    \43\ Id.
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C. Consistency With Rules 17Ad-22(e)(6)(i) and (v)

    Rule 17Ad-22(e)(6)(i) requires that NSCC establish, implement,
maintain and enforce written policies and procedures reasonably
designed to cover its credit exposures to its participants by
establishing a risk-based margin system that, at a minimum, considers,
and produces margin levels commensurate with, the risks and particular
attributes of each relevant product, portfolio, and market.\44\ Rule
17Ad-22(e)(6)(v) requires that NSCC establish, implement, maintain and
enforce written policies and procedures reasonably designed to cover
its credit exposures to its participants by establishing a risk-based
margin system that, at a minimum, uses an appropriate method for
measuring credit exposure that accounts for relevant product risk
factors and portfolio effects across products.\45\
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    \44\ 17 CFR 240.17Ad-22(e)(6)(i).
    \45\ 17 CFR 240.17Ad-22(e)(6)(v).
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    As described above in Section I.B., NSCC proposes to replace the
current methodology for calculating municipal bond haircut percentages
with a methodology that would utilize the historical returns of one or
more benchmark indices over a look-back period of not shorter than 10
years, using a minimum 99% calibration percentile. NSCC designed the
proposed methodology to generate margin amounts that are more
commensurate with the risk attributes of municipal bonds than the
current methodology. Accordingly, the Commission believes

that the proposed methodology is consistent with Rules 17Ad-22(e)(6)(i)
and (v) because it is designed to establish a risk-based margin system
that (1) considers and produces relevant margin levels commensurate
with the risks and particular attributes of municipal bonds, and (2)
uses an appropriate method for measuring credit exposure that accounts
for municipal bond risk factors and portfolio effects.\46\
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    \46\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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    As described above in Section I.B., NSCC proposes to re-calibrate
the municipal bond haircut percentages no less frequently than
annually. The proposal would require NSCC to regularly review the
municipal bond haircut percentages, thereby helping to ensure that the
haircut percentages and resulting margin levels take into account any
changes over time to the risk attributes of municipal bonds.
Accordingly, the Commission believes that the proposal to re-calibrate
the municipal bond haircut percentages no less frequently than annually
is consistent with Rules 17Ad-22(e)(6)(i) and (v) because it would
contribute to a risk-based margin system designed to (1) consider and
produce relevant margin levels commensurate with the risks and
particular attributes of municipal bonds, and (2) use an appropriate
method for measuring credit exposure that accounts for municipal bond
risk factors and portfolio effects.\47\
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    \47\ Id.
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    As described above in Section I.B., NSCC proposes to have the
ability to use the highest percentage generated for any municipal bond
group when calculating the haircut-based volatility component for
municipal bonds issued by a municipality or issuer presenting unique
risks not otherwise captured by the calculations in the proposed
methodology. This discretion should help ensure that NSCC collects
sufficient margin amounts with respect to those securities.
Accordingly, the Commission believes that the proposed discretion to
apply the highest percentage to such municipal bonds is consistent with
Rules 17Ad-22(e)(6)(i) and (v) because it would contribute to a risk-
based margin system designed to (1) consider and produce relevant
margin levels commensurate with the risks and particular attributes of
municipal bonds, and (2) use an appropriate method for measuring credit
exposure that accounts for municipal bond risk factors and portfolio
effects.\48\
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    \48\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-NSCC-2019-801) and that NSCC is authorized to
implement the proposed change as of the date of this notice or the date
of an order by the Commission approving proposed rule change SR-NSCC-
2019-004, whichever is later.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-03055 Filed 2-14-20; 8:45 am]
 BILLING CODE 8011-01-P