[Federal Register Volume 82, Number 68 (Tuesday, April 11, 2017)]
[Notices]
[Pages 17475-17481]
[FR Doc No: 2017-07180]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80381; File No. SR-NSCC-2017-002]

Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Enhance the
Credit Risk Rating Matrix and Make Other Changes

April 5, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 22, 2017, National Securities Clearing Corporation (``NSCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On March 22, 2017, NSCC filed this proposed rule change as
an advance notice (SR-NSCC-2017-801) with the Commission 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, 12 U.S.C. 5465(e)(1), and Rule
19b-4(n)(1)(i) of the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of the
advance notice 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
Proposed Rule Change

    The proposed rule change consists of amendments to NSCC's Rules and
Procedures (``Rules'').\4\ The proposed rule change would amend the
Rules in order to (i) enhance the matrix (hereinafter referred to as
the ``Credit Risk Rating Matrix'' or ``CRRM'') \5\ developed by NSCC to
evaluate the risks posed by certain Members (``CRRM-Rated Members'') to
NSCC and its Members from providing services to these CRRM-Rated
Members and (ii) make other amendments to the Rules to provide more
transparency and clarity regarding NSCC's current ongoing membership
monitoring process.
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    \4\ Capitalized terms not defined herein are defined in the
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
    \5\ The proposed rule changes with respect to the enhancement of
the CRRM are reflected in the inclusion of (i) qualitative factors
and examples thereof in the proposed new definition for ``Credit
Risk Rating Matrix'' in Rule 1 and (ii) Members that are foreign
banks or trust companies that have audited financial data that is
publicly available in Section 4(b)(i) of Rule 2B.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

1. Purpose
    The proposed rule change would, among other things, enhance the
CRRM to enable it to rate Members that are foreign banks or trust
companies and have audited financial data that is publicly available.
It would also enhance the CRRM by allowing it to take into account
qualitative factors when generating credit ratings for Members. In
addition, it would enhance the CRRM by shifting it from a relative
scoring approach to an absolute scoring approach.
    This rule filing also contains proposed rule changes that are not
related to the proposed CRRM enhancements but that provide specificity,
clarity and additional transparency to the Rules related to NSCC's
current ongoing membership monitoring process.
(i) Background
    NSCC occupies an important role in the securities settlement system
by interposing itself as a central counterparty between Members that
are counterparties to transactions accepted for clearing by NSCC,
thereby reducing the risk faced by Members. NSCC uses the CRRM, the
Watch List (as defined below) and the enhanced surveillance to manage
and monitor default risks of Members on an ongoing basis, as discussed
below. The level and frequency of such monitoring for a Member is
determined by the Member's risk of default as assessed by NSCC. Members
that are deemed by NSCC to pose a heightened risk to NSCC and its
Members are subject to closer and more frequent monitoring.
Existing Credit Risk Rating Matrix
    In 2005, the Commission approved a proposed rule change filed by
NSCC (``Initial Filing'') \6\ to establish new criteria for placing
certain Members on a list for closer monitoring (``Watch List'').
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    \6\ See Securities Exchange Act Release No. 51362 (March 11,
2005), 70 FR 13562 (March 21, 2005) (SR-NSCC-2003-11).
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    NSCC proposed in the Initial Filing that all U.S. broker-dealers
and U.S. banks that were Members would be assigned a rating generated
by entering financial data of those Members into an internal risk
assessment matrix, i.e., the CRRM. However, the text of the current
Rule 2B, Section 4, does not specify which Members are CRRM-Rated
Members and whether non-CRRM-Rated Members may be included on the Watch
List.
    Currently, Members that are U.S. broker-dealers and U.S. banks are
assessed against the CRRM and assigned a credit rating based on certain
quantitative factors.\7\ Unfavorably-rated Members are placed on the
Watch List. In addition, NSCC credit risk staff may downgrade a
particular Member's credit rating based on various qualitative factors.
An example of such qualitative factors might be that the Member in
question received a qualified audit opinion on its annual audit. NSCC
believes that, in order to protect NSCC and its other Members, it is
important that credit risk staff maintain the discretion to downgrade a
Member's credit rating on the CRRM and thus subject the Member to
closer monitoring.
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    \7\ Quantitative factors considered by NSCC include (a) for
broker dealers, size (i.e., total excess net capital), capital,
leverage, liquidity, and profitability and (b) for banks, size,
capital, asset quality, earnings, and liquidity.
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    The current CRRM is comprised of two credit rating models--one for
the U.S. broker-dealers and one for the U.S. banks--and generates
credit ratings for the relevant Members based on a 7-point rating
system, with ``1'' being the strongest credit rating and ``7'' being
the weakest credit rating.
    Over time, the current CRRM has not kept pace with NSCC's evolving
membership base and heightened expectations from regulators and
stakeholders for robustness of financial models. Specifically, the
current CRRM only generates credit ratings for those Members that are
U.S. banks or U.S. broker-dealers that file standard reports with their
regulators. Although these types of Members currently represent the
vast majority (approximately 95%) of Members at NSCC,\8\ foreign banks
and trust companies are expected to be a growing category of NSCC's
membership base in the future, and the proposed enhancements to the
CRRM would enable it to assign credit ratings to these entities.
Foreign banks and trust companies are typically large global financial
institutions that have complex businesses and conduct a high volume of
activities. Although foreign banks and trust companies are not
currently rated by the CRRM, they are monitored by NSCC's credit risk
staff using financial criteria deemed relevant by NSCC and can be
placed on the Watch List if they experience a financial change that
presents risk to NSCC. Given the potential increase in the number of
Members that are foreign banks or trust companies in the coming years,
there is a need to formalize NSCC's credit risk evaluation process of
these Members by assigning credit ratings to them in order to better
facilitate the comparability of credit risks among Members.\9\
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    \8\ As of March 16, 2017, there are 155 Members. Of the 155
Members, 11 (or 7%) are U.S. banks, 136 (or 88%) are U.S. broker-
dealers and one (or 1%) is a foreign bank or trust company.
    \9\ CRRM is applied across NSCC and its affiliated clearing
agencies, Fixed Income Clearing Corporation (``FICC'') and The
Depository Trust Company (``DTC''). Specifically, in order to run
the CRRM, credit risk staff uses the financial data of the
applicable NSCC Members in addition to data of applicable members
and participants of FICC and DTC, respectively. In this way, each
applicable NSCC Member is rated against other applicable members and
participants of FICC and DTC, respectively.
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    In addition, the current CRRM assigns each Member that is a U.S.
bank or U.S. broker-dealer and that files standard reports with its
regulator(s) a credit rating based on inputting certain quantitative
data relative to the applicable Member into the CRRM. Accordingly, a
Member's credit rating is currently based solely upon quantitative
factors. It is only after the CRRM has generated a credit rating with
respect to a particular Member that such Member's credit rating may be
downgraded manually by credit risk staff, after taking into
consideration relevant qualitative factors. The inability of the
current CRRM to take into account qualitative factors requires frequent
and manual overrides by credit risk staff, which may result in
inconsistent and/or incomplete credit ratings for Members.
    Furthermore, the current CRRM uses a relative scoring approach and
relies on peer grouping of Members to calculate the credit rating of a
Member. This approach is not ideal because a Member's credit rating can
be affected by changes in its peer group even if the Member's financial
condition is unchanged.
Proposed Credit Risk Rating Matrix Enhancements
    To improve the coverage and the effectiveness of the current CRRM,
NSCC is proposing three enhancements. The first proposed enhancement
would expand the scope of CRRM coverage by enabling the CRRM to
generate credit ratings for Members that are foreign banks or trust
companies and that have audited financial data that is publicly
available. The second proposed enhancement would incorporate
qualitative factors into the CRRM and therefore is expected to reduce
the need and the frequency of manual overrides of Member credit
ratings. The third enhancement would replace the relative scoring
approach currently used by CRRM with a statistical approach to

estimate the absolute probability of default of each Member.
A. Enable the CRRM To Generate Credit Ratings for Foreign Bank or Trust
Company Members
    The current CRRM is comprised of two credit rating models--one for
the U.S. broker-dealers and one for the U.S. banks. NSCC is proposing
to enhance the CRRM by adding an additional credit rating model for the
foreign banks and trust companies. The additional model would expand
the membership classes to which the CRRM would apply to include Members
that are foreign banks or trust companies and that have audited
financial data that is publicly available. The CRRM credit rating of a
Member that is a foreign bank or trust company would be based on
quantitative factors, including size, capital, leverage, liquidity,
profitability and growth, and qualitative factors, including market
position and sustainability, information reporting and compliance,
management quality, capital management and business/product diversity.
By enabling the CRRM to generate credit ratings for these Members, the
enhanced CRRM would provide more comprehensive credit risk coverage of
NSCC's membership base.
    With the proposed enhancement to the CRRM as described above,
applicable foreign bank or trust company Members would be included in
the CRRM process and be evaluated more effectively and efficiently
because financial data with respect to these foreign bank or trust
company Members could be extracted from data sources in an automated
form.\10\
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    \10\ Currently, these Members are monitored by NSCC credit risk
staff that review similar criteria as those reviewed for CRRM-Rated
Members, but such review occurs outside of the CRRM process.
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    After the proposed enhancement, CRRM would be able to generate
credit ratings on an ongoing basis for all Members that are U.S. banks,
U.S. brokers-dealers and foreign banks and trust companies, which
together represent approximately 96% of the NSCC Members.\11\
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    \11\ As of March 16, 2017, there are 7 Members that would not be
rated by the enhanced CRRM, as proposed, because they are central
securities depositories, securities exchanges and U.S. trust
companies that do not file Call Reports (as defined below).
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B. Incorporate Qualitative Factors Into the CRRM
    In addition, as proposed, the enhanced CRRM would blend qualitative
factors with quantitative factors to produce a credit rating for each
applicable Member in relation to the Member's credit risk. For U.S. and
foreign banks and trust companies, the enhanced CRRM would use a 70/30
weighted split between quantitative and qualitative factors to generate
credit ratings. For U.S. broker-dealers, the weight split between
quantitative and qualitative factors would be 60/40. These weight
splits are chosen by NSCC based on the industry best practice as well
as research and sensitivity analysis conducted by NSCC. NSCC would
review and adjust the weight splits as well as the quantitative and
qualitative factors, as needed, based on recalibration of the CRRM to
be conducted by NSCC approximately every three to five years.
    Although there are advantages to measuring credit risk
quantitatively, quantitative evaluation models alone are incapable of
fully capturing all credit risks. Certain qualitative factors may
indicate that a Member is or will soon be undergoing financial
distress, which may in turn signal a higher default exposure to NSCC
and its other Members. As such, a key enhancement being proposed to the
CRRM is the incorporation of relevant qualitative factors into each of
the three credit rating models mentioned above. By including
qualitative factors in the three credit rating models, the enhanced
CRRM would capture risks that would otherwise not be accounted for with
quantitative factors alone.\12\ Adding qualitative factors to the CRRM
would not only enable it to generate more consistent and comprehensive
credit ratings for applicable Members, but it would also help reduce
the need and frequency of manual credit rating overrides by the credit
risk staff because overrides would likely only be required under more
limited circumstances.\13\
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    \12\ The initial set of qualitative factors that would be
incorporated into the CRRM includes (a) for U.S. broker dealers,
market position and sustainability, management quality, capital
management, liquidity management, geographic diversification,
business/product diversity and access to funding, (b) for U.S.
banks, environment, compliance/litigation, management quality,
liquidity management and parental demands and (c) for foreign banks
and trust companies, market position and sustainability, information
reporting and compliance, management quality, capital management and
business/product diversity.
    \13\ Once a Member is assigned a credit rating, if circumstances
warrant, credit risk staff would still have the ability to override
the CRRM-issued credit rating by manually downgrading such rating as
they do today. To ensure a conservative approach, the CRRM-issued
credit ratings cannot be manually upgraded.
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C. Shifting From Relative Scoring to Absolute Scoring
    As proposed, the enhanced CRRM would use an absolute scoring
approach and rank each Member based on its individual probability of
default rather than the relative scoring approach that is currently in
use. This proposed change is designed to have a Member's CRRM-generated
credit rating reflect an absolute measure of the Member's default risk
and eliminate any potential distortion of a Member's credit rating from
the Member's peer group that may occur under the relative scoring
approach used in the existing CRRM.
D. Watch List and Enhanced Surveillance
    In addition to the Watch List, NSCC also maintains an enhanced
surveillance list (referenced herein and in the proposed rule text as
``enhanced surveillance'') for membership monitoring. The enhanced
surveillance list is generally used when Members are undergoing drastic
and unexpected changes in their financial conditions or operation
capabilities and thus are deemed by NSCC to be of the highest risk
level and/or warrant additional scrutiny due to NSCC's ongoing concerns
about these Members. Accordingly, Members that are subject to enhanced
surveillance are reported to NSCC's management committees and are also
regularly reviewed by a cross-functional team comprised of senior
management of NSCC. More often than not, Members that are subject to
enhanced surveillance are also on the Watch List. The group of Members
that is subject to enhanced surveillance is generally much smaller than
the group on the Watch List. The enhanced surveillance list is an
internal tool for NSCC that triggers increased monitoring of a Member
above the monitoring that occurs when a Member is on the Watch List.
    A Member could be placed on the Watch List either based on its
credit rating of 5, 6 or 7, which can either be generated by the CRRM
or from a manual downgrade, or when NSCC deems such placement as
necessary to protect NSCC and its Members. In contrast, a Member would
be subject to enhanced surveillance only when close monitoring of the
Member is deemed necessary to protect NSCC and its Members.
    The Watch List and enhanced surveillance tools are not mutually
exclusive; they may complement each other under certain circumstances.
A key distinction between the Watch List and enhanced surveillance is
that being placed on the Watch List may result in Required Deposit \14\
related

consequences under the Rules, whereas enhanced surveillance does
not.\15\ For example, a Member that is in a precarious situation could
be placed on the Watch List and be subject to enhanced surveillance;
however, because the Watch List status could increase a Member's
Required Deposit, when NSCC has preliminary concerns about a Member, to
avoid potential increase to a Member's Required Deposit, NSCC may opt
not to place the Member on the Watch List until it is certain that such
concerns would not be alleviated in the short-term. Instead, in such a
situation, NSCC might first subject the Member to enhanced surveillance
in order to closely monitor the Member's situation without affecting
the Member's Required Deposit. If the Member's situation improves, then
it will no longer be subject to enhanced surveillance. If the situation
of the Member worsens, the Member may then be placed on the Watch List
as deemed necessary by NSCC.
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    \14\ See Rule 4 (Section 1). The ``Required Deposit'' is the
amount that each Member is required to deposit in NSCC's Clearing
Fund. Rules, supra note 4.
    \15\ NSCC expects to provide additional clarity to Members
regarding the Watch List and its impact on Required Deposit in a
subsequent proposed rule change to be filed with the Commission in
2017.
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(ii) Detailed Description of the Proposed Rule Changes Related to the
Proposed CRRM Enhancements
    In connection with the proposed enhancements to the CRRM, NSCC
proposes to amend the Rules to (1) incorporate qualitative factors into
CRRM and (2) add Members that are foreign banks or trust companies to
the categories of Members that would be assigned credit ratings by NSCC
using the CRRM.
A. Proposed Changes to Rule 1 (Definitions and Descriptions)
    NSCC is proposing to include qualitative factors, such as
management quality, market position/environment, and capital and
liquidity risk management in the proposed new definition for ``Credit
Risk Rating Matrix'' in Rule 1 because, as proposed, the enhanced CRRM
would blend both qualitative factors and quantitative factors to
produce a credit rating for each applicable Member.
B. Proposed Changes to Section 4(b)(i) of Rule 2B (Ongoing Membership
Requirements and Monitoring)
    NSCC is proposing to expand the membership types to which the CRRM
would apply to include Members that are foreign banks or trust
companies and that have audited financial data that is publicly
available by amending Section 4 of Rule 2B.
    The enhanced CRRM would assign credit ratings for each Member that
is a foreign bank or trust company based on its publicly available
audited financial data. The credit rating would be based on an 18-point
scale, which is then mapped to the 7-point rating system currently in
use today, with ``1'' being the strongest credit rating and ``7'' being
the weakest credit rating.
(iii) Other Proposed Rule Changes
    This rule filing also contains proposed rule changes that are
unrelated to the proposed enhancement of the CRRM. These proposed rule
changes would provide specificity, clarity and additional transparency
to the Rules with respect to NSCC's current ongoing membership
monitoring process, as described below.
A. Proposed Changes to Rule 1 (Definitions and Descriptions)
    NSCC is proposing to amend Rule 1 to add definitions for the CRRM
and the Watch List.
    The proposed definition of the CRRM would provide that the term
``Credit Risk Rating Matrix'' means a matrix of credit ratings of
Members as specified in Section 4 of Rule 2B. The definition would
state that the CRRM is developed by NSCC to evaluate the credit risk
such Members pose to NSCC and its Members and is based on factors
determined to be relevant by NSCC from time to time, which factors are
designed to collectively reflect the financial and operational
condition of a Member. The proposed definition would state that, in
addition to the proposed qualitative factors described above, these
factors include quantitative factors, such as capital, assets, earnings
and liquidity.
    The proposed definition of the Watch List would provide that the
term ``Watch List'' means, at any time and from time to time, the list
of Members whose credit ratings derived from the CRRM are 5, 6 or 7, as
well as Members and Limited Members that, based on NSCC's consideration
of relevant factors, including those set forth in Section 4(d) of Rule
2B (described below), are deemed by NSCC to pose a heightened risk to
NSCC and its Members.
B. Proposed Changes to Rule 2B (Ongoing Membership Requirements and
Monitoring)
Section 2B of Rule 2B
    NSCC is proposing to amend Section 2B of Rule 2B to state that NSCC
may review the financial responsibility and operational capability of
each Member and may otherwise require additional reporting from the
Member regarding its financial or operational condition that may (1)
include information regarding the businesses and operations of the
Member and its risk management practices with respect to NSCC's
services utilized by the Member for another Person and (2) result in
the Member being placed on the Watch List and/or being subject to
enhanced surveillance as determined by NSCC.
    Members are direct participants of NSCC. However, there are firms
that rely on the services provided by Members in order to have their
activity cleared and settled through NSCC's facilities (the ``indirect
participants''). These indirect participants pose certain risks to NSCC
that need to be identified and monitored as part of NSCC's ongoing
member due diligence process. In order for NSCC to understand (1) the
material dependencies between Members and the indirect participants
that rely on the Members for the clearance and settlement of the
indirect participants' transactions, (2) significant Member-indirect
participant relationships and (3) the various risk controls and
mitigants that these Members employ to manage their risks with respect
to such relationships, NSCC may request information from Members
regarding the Members' businesses and operations as well as their risk
management practices with respect to services of NSCC utilized by the
Members for indirect participants. The information provided by Members
would then be taken into consideration by NSCC when determining whether
a Member may need to be placed on the Watch List, be subject to
enhanced surveillance or both.
Section 4 of NSCC Rule 2B
    NSCC is proposing to amend Section 4 of Rule 2B in order to (1)
specify the membership types that are currently subject to NSCC's
ongoing monitoring and review, (2) clarify which U.S. broker-dealers
and U.S. banks will be assigned a credit rating by NSCC in accordance
with the CRRM, (3) provide that NSCC may manually downgrade a CRRM-
Rated Member's credit rating in certain instances, (4) provide that
NSCC may place non-CRRM-Rated Members and certain Limited Members on
the Watch List and/or subject them to enhanced surveillance, if
necessary, (5) describe some of the factors that could be taken into
consideration by NSCC when downgrading a Member's or Limited Member's
credit rating, placing a Member or Limited Member on the Watch List
and/or subjecting a Member or Limited Member to enhanced

surveillance, (6) allow NSCC to collect additional deposits to the
Clearing Fund and to retain deposits in excess of the Required Deposit
from Members or Limited Members that are on the Watch List and (7)
provide for enhanced monitoring of Members or Limited Members that are
on the Watch List and/or are subject to enhanced surveillance.
    In connection with the forgoing, NSCC proposes to delete the
current first paragraph in Section 4 of NSCC Rule 2B and add the
following:
    1. Section 4(a), specifying that NSCC currently monitors and
reviews all Members and certain Limited Members on an ongoing and
periodic basis, which may include monitoring news and market
developments relating to these Members and Limited Members and
conducting reviews of financial reports and other public information of
these Members and Limited Members.
    2. Section 4(b)(i), clarifying that (1) Members that are (A) U.S.
banks or trust companies that file the Consolidated Report of Condition
and Income (``Call Report'') or (B) U.S. broker-dealers that file the
Financial and Operational Combined Uniform Single Report (``FOCUS
Report'') or the equivalent with their regulators, would be assigned a
credit rating by NSCC in accordance with the CRRM and (2) each CRRM-
Rated Member's credit rating would be reassessed upon receipt of
additional information from the Member.
    3. Section 4(b)(ii), providing that, because the factors used as
part of the CRRM may not identify all risks that a Member may pose to
NSCC, NSCC may, in addition to other actions permitted by the Rules,
downgrade the Member's credit rating derived from the CRRM if NSCC
believes the CRRM-generated rating is insufficiently conservative or if
it deems such downgrade as necessary to protect NSCC and its Members.
Depending on the credit rating of the Member, a downgrade may result in
the Member being placed on the Watch List and/or being subject to
enhanced surveillance based on relevant factors.
    4. Section 4(c), specifying that, other than CRRM-Rated Members,
NSCC may place Members and Limited Members that are monitored and
reviewed by NSCC on the Watch List and/or subject them to enhanced
surveillance even though they are not being assigned credit ratings by
NSCC in accordance with the CRRM.
    5. Section 4(d), describing some of the factors that could be taken
into consideration by NSCC when downgrading a Member's credit rating,
placing a Member or Limited Member on the Watch List and/or subjecting
a Member or Limited Member to enhanced surveillance. These factors
include but are not limited to (i) news reports and/or regulatory
observations that raise reasonable concerns relating to the Member or
Limited Member, (ii) reasonable concerns around the Member's or Limited
Member's liquidity arrangements, (iii) material changes to the Member's
or Limited Member's organizational structure, (iv) reasonable concerns
of NSCC about the Member's or Limited Member's financial stability due
to particular facts and circumstances, such as material litigation or
other legal and/or regulatory risks, (v) failure of the Member or
Limited Member to demonstrate satisfactory financial condition or
operational capability or if NSCC has a reasonable concern regarding
the Member's or Limited Member's ability to maintain applicable
membership standards and (vi) failure of the Member or Limited Member
to provide information required by NSCC to assess risk exposures posed
by the Member's or Limited Member's activity.
    6. Section 4(e), allowing NSCC to (1) require a Member or Limited
Member that has been placed on the Watch List to make and maintain
additional deposits to the Clearing Fund and (2) withhold any deposit
in excess of the Required Deposit of a Member or Limited Member that
has been placed on the Watch List as provided in Section 9 of Rule 4.
    7. Section 4(f), providing that NSCC would, in addition to other
actions permitted by the Rules, conduct a more thorough monitoring of
the financial condition and/or operational capability of, and require
more frequent financial disclosures from, not only those Members and
Limited Members that are placed on the Watch List but also Members and
Limited Members subject to enhanced surveillance, including examples of
how the monitoring could be conducted and the types of disclosures that
may be required. In addition, Members and Limited Members that are
subject to enhanced surveillance would be reported to NSCC's management
committees and regularly reviewed by a cross-functional team comprised
of senior management of NSCC.
    In addition to the proposed changes described above, NSCC is
proposing to make technical corrections to the second paragraph of
Section 4 of Rule 2B to (1) renumber the paragraph as Section 4(g), (2)
update an internal cross reference and (3) clarify that the references
in the paragraph to Members under surveillance are referring to Members
on the Watch List.
C. Proposed Changes to Rule 4 (Clearing Fund)
    NSCC is proposing to amend Section 9 of Rule 4 to clarify that NSCC
may, in its discretion, withhold all or part of any excess Clearing
Fund deposit of Members that are on the Watch List.
D. Proposed Changes to Procedure XV (Clearing Fund Formula and Other
Matters)
    NSCC is proposing to amend Section I(B)(1) of Procedure XV to
clarify that Members or Limited Members that are placed on the Watch
List would be required to make additional Clearing Fund deposits, as
determined by NSCC.
    In addition, NSCC is proposing to make the following technical
corrections to Section I(B)(1) of Procedure XV, (i) renumber the final
three paragraphs as Section I(B)(2) and title the new subsection
``Family Issued Securities'' to reflect the different subject matter of
the new subsection, (ii) capitalize references to the Credit Risk
Rating Matrix to reflect the proposed addition of the defined term to
Rule 1 and (iii) make other grammatical corrections to the new Section
I(B)(2).
    Finally, NSCC is proposing to amend Section II(C) of Procedure XV
to clarify that, although NSCC would not request additional Clearing
Fund deposits from Members unless they exceed a predetermined
threshold, such floor would not apply to Members or Limited Members
that are on the Watch List.
E. Additional Proposed Changes to Rule 1 (Definitions and Descriptions)
and Procedure XV (Clearing Fund Formula and Other Matters)
    NSCC is proposing to amend the definition of ``Illiquid Position''
in Rule 1 as well as Procedure XV Sections I(A)(1) and I(A)(2), each as
proposed in connection with a separate proposed rule change filed with
the Commission but not yet approved.\16\ Specifically, the proposed
amendments would replace and conform references to ``credit risk
matrix'' with ``Credit Risk Rating Matrix'' in the proposed definition
of ``Illiquid Position'' in Rule 1 as well as Procedure XV Sections
I(A)(1) and I(A)(2).
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    \16\ See Securities Exchange Act Release No. 80260 (March 16,
2017), 82 FR 14781 (March 22, 2017) (SR-NSCC-2017-001).
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Implementation Timeframe
    Pending Commission approval, NSCC expects to implement this
proposal promptly. Members would be advised of the implementation date
of this proposal through issuance of a NSCC Important Notice.

2. Statutory Basis
    Section 17A(b)(3)(F) of the Act requires that the Rules be designed
to promote the prompt and accurate clearance and settlement of
securities transactions and to assure the safeguarding of securities
and funds which are in the custody or control of NSCC or for which it
is responsible.\17\
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
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    By enhancing the CRRM to enable it to assign credit ratings to
Members that are foreign banks or trust companies and that have audited
financial data that is publicly available, NSCC believes that the
proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act. This is because the proposed rule change expands the CRRM's
applicability to a wider group of Members, which further improves
NSCC's membership monitoring process and better enables NSCC to
safeguard the securities and funds which are in its custody or control
or for which it is responsible in furtherance of the Act.
    Similarly, by enhancing the CRRM to enable it to incorporate
qualitative factors when assigning a Member's credit rating, NSCC
believes that this proposed rule change is consistent with Section
17A(b)(3)(F) of the Act. This is because the proposed rule change would
enable NSCC to take into account relevant qualitative factors in an
automated and more effective manner when monitoring the credit risks
presented by Members, thus improving NSCC's membership monitoring
process overall, which would in turn better enable NSCC to safeguard
the securities and funds which are in its custody or control or for
which it is responsible in furtherance of the Act.
    Likewise, by enhancing the CRRM to shift from a relative scoring
approach to an absolute scoring approach when assigning a Member's
credit rating, NSCC believes that this proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act. This is because the
proposed rule change would enable NSCC to generate credit ratings for
Members that are more reflective of the Members' default risk, thus
improving NSCC's membership monitoring process overall, which would in
turn better enable NSCC to safeguard the securities and funds which are
in its custody or control or for which it is responsible in furtherance
of the Act.
    By providing specificity, clarity and additional transparency to
the Rules related to NSCC's current ongoing membership monitoring
process, NSCC believes that the proposed rule changes to (1) Rule 1
(Definitions of Credit Risk Rating Matrix, Watch List and Illiquid
Position), Rule 2B (Sections 2B and 4), Rule 4 and Procedure XV
(Sections I(A), I(B) and II(C)), which are unrelated to the proposed
enhancements of the CRRM, are consistent with Section 17A(b)(3)(F) of
the Act because the proposed rule changes would help ensure that the
Rules remain accurate and clear. Collectively, the proposed changes
would help ensure that the Rules are more transparent, accurate and
clear, which would help enable all stakeholders to readily understand
their respective rights and obligations with NSCC's clearance and
settlement of securities transactions. Therefore, NSCC believes that
the proposed rule changes would promote the prompt and accurate
clearance and settlement of securities transactions, consistent with
Section 17A(b)(3)(F) of the Act.
    The proposed enhancements to the CRRM are consistent with Rule
17Ad-22(e)(3)(i) under the Act, which was recently adopted by the
Commission.\18\ Rule 17Ad-22(e)(3)(i) will require NSCC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain a sound risk management framework for
comprehensively managing risks that arise in or are born by NSCC, which
includes . . . systems designed to identify, measure, monitor and
manage the range of risks that arise in or are borne by NSCC.\19\ The
proposed enhancements to the CRRM have been designed to assist NSCC in
identifying, measuring, monitoring and managing the credit risks to
NSCC posed by its Members. The proposed enhancements to the CRRM
accomplish this by (i) expanding the CRRM's applicability to a wider
group of Members to include Members that are foreign banks or trust
companies, (ii) enabling the CRRM to take into account relevant
qualitative factors in an automated and more effective manner when
monitoring the credit risks presented by Members and (iii) enabling the
CRRM to generate credit ratings for Members that are more reflective of
the Members' default risk by shifting to an absolute scoring approach,
all of which would improve NSCC's membership monitoring process
overall. Therefore, NSCC believes the proposed enhancements to the CRRM
would assist NSCC in identifying, measuring, monitoring and managing
risks that arise in or are born by NSCC, consistent with the
requirements of Rule 17Ad-22(e)(3)(i).
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    \18\ 17 CFR 240.17Ad-22(e)(3)(i). The Commission adopted
amendments to Rule 17Ad-22, including the addition of new subsection
17Ad-22(e), on September 28, 2016. See Securities Exchange Act
Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13,
2016) (S7-03-14). NSCC is a ``covered clearing agency'' as defined
by the new Rule 17Ad-22(a)(5) and must comply with new subsection
(e) of Rule 17Ad-22 by April 11, 2017. Id.
    \19\ Id.
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    The proposed rule change to Section 2B of Rule 2B with respect to
the scope of information that may be requested by NSCC from its Members
has been designed to be consistent with Rule 17Ad-22(e)(19) under the
Act, which was recently adopted by the Commission.\20\ Rule 17Ad-
22(e)(19) will require NSCC to establish, implement, maintain and
enforce written policies and procedures reasonably designed to
identify, monitor, and manage the material risk to NSCC arising from
arrangements in which firms that are indirect participants in NSCC rely
on the services provided by Members to access NSCC's payment, clearing,
or settlement facilities.\21\ By expressly reflecting in the Rules what
is already NSCC's current practice associated with its request for
additional reporting of a Member's financial or operational conditions
to state that such request may include information regarding the
businesses and operations of the Member, as well as its risk management
practices with respect to services of NSCC utilized by the Member for
another Person, this proposed rule change would help enable NSCC to
have rule provisions that are reasonably designed to identify, monitor
and manage the material risks to NSCC arising from tiered participation
arrangements consistent with Rule 17Ad-22(e)(19).
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    \20\ 17 CFR 240.17Ad-22(e)(19). Id.
    \21\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change to (i) enable
the CRRM to generate credit ratings for Members that are foreign banks
or trust companies Members, (ii) incorporate qualitative factors into
the CRRM and (iii) shift to an absolute scoring approach would impose
any burden on competition that is not necessary or appropriate in
furtherance of the Act.\22\ These proposed enhancements to the CRRM
would improve NSCC's member credit risk evaluation process by (1)
expanding the CRRM's credit rating capability and thereby providing
more comprehensive credit risk coverage of NSCC membership, (2)
enabling the CRRM to generate more consistent and comprehensive credit
ratings for Members and thereby reducing the need

and frequency for manual downgrades and (3) enabling the CRRM to
generate credit ratings for Members that are more reflective of the
Members' default risk. However, NSCC recognizes that any change to its
member credit risk evaluation process, such as the proposed rule
change, may impose a burden on competition in terms of potential impact
on Members' credit ratings and their Clearing Fund deposits.
Nevertheless, NSCC believes that any burden on competition derived from
the proposed rule change would be necessary and appropriate in
furtherance of the Act because the proposed enhancements to the CRRM
would help improve NSCC's membership monitoring process and thus better
enable NSCC to safeguard the securities and funds which are in its
custody or control or for which it is responsible. Furthermore, the
proposed enhancements to the CRRM would also assist NSCC in
identifying, measuring, monitoring and managing risks that arise in or
are born by NSCC. As such, NSCC does not believe the proposed
enhancements to the CRRM would impose any burden on competition that is
not necessary or appropriate in furtherance of the Act.
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    \22\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    NSCC does not believe that the proposed rule changes to (1) NSCC
Rule 1 (Definitions of Credit Risk Rating Matrix, Watch List and
Illiquid Position), NSCC Rule 2B (Sections 2B and 4), Rule 4 and
Procedure XV (Sections I(A), I(B) and II(C)) that are unrelated to the
proposed CRRM enhancements would have any impact on competition because
each of such proposed rule changes is designed to provide additional
specificity, clarity and transparency in the Rules regarding NSCC's
current ongoing membership monitoring process by expressly providing in
the Rules NSCC's current practices with respect to such process. As
such, these proposed rule changes would not impact Members or impose
any burden on competition.

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

    Written comments relating to this proposed rule change have not
been solicited or received. NSCC will notify the Commission of any
written comments received by NSCC.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self- regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.
    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 proposed rule
change is consistent with the 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_ADDRESS>Please include
File Number SR-NSCC-2017-002 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2017-002. 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 that are
filed with the Commission, and all written communications relating to
the proposed rule change 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-2017-002 and should be
submitted on or before May 2, 2017.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07180 Filed 4-10-17; 8:45 am]
 BILLING CODE 8011-01-P