[Federal Register Volume 87, Number 169 (Thursday, September 1, 2022)]
[Notices]
[Pages 53796-53805]
[FR Doc No: 2022-18861]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95618; File No. SR-NSCC-2021-016)

Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving of Proposed Rule Change To Enhance Capital
Requirements and Make Other Changes

August 26, 2022.

I. Introduction

    On December 13, 2021, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2021-016 (the ``Proposed
Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed
Rule Change was published for comment in the Federal Register on
December 29, 2021.\3\ On January 26, 2022, pursuant to Section 19(b)(2)
of the Act,\4\ the Commission designated a longer period within which
to approve, disapprove, or institute proceedings to determine whether
to approve or disapprove the Proposed Rule Change.\5\ On March 23,
2022, the Commission instituted proceedings to determine whether to
approve or
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 93856 (December 22,
2021), 86 FR 74185 (December 29, 2021) (File No. SR-NSCC-2021-016)
(``Notice of Filing'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 94068 (January 26,
2022), 87 FR 5544 (February 1, 2022) (SR-NSCC-2021-016).

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disapprove the Proposed Rule Change.\6\ On June 23, 2022, the
Commission designated a longer period for Commission action on the
proceedings to determine whether to approve or disapprove the Proposed
Rule Change.\7\ The Commission received comment letters on the Proposed
Rule Change.\8\ For the reasons discussed below, the Commission is
approving the Proposed Rule Change.\9\
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    \6\ Securities Exchange Act Release No. 94494 (March 23, 2022),
87 FR 18444 (March 30, 2022) (SR-NSCC-2021-016).
    \7\ Securities Exchange Act Release No. 94168 (June 23, 2022),
87 FR 38792 (June 29, 2022) (SR-NSCC-2021-016).
    \8\ Comments are available at https://www.sec.gov/comments/sr-nscc-2021-016/srnscc2021016.htm. The Commission received comments on
April 22-23, 2022, that address market conduct generally. However,
additional discussion is unnecessary because the comment letters do
not bear on the Proposed Rule Change.
    \9\ Capitalized terms not defined herein are defined in NSCC's
Rules & Procedures (``Rules''), available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
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II. Description of the Proposed Rule Change

    NSCC proposes to amend its Rules to (A) increase the capital
requirements applicable to its members,\10\ (B) revise its credit risk
monitoring system, and (C) make certain other clarifying, technical,
and supplementary changes to implement changes (A) and (B).
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    \10\ NSCC states that these capital requirements have not been
updated in over 20 years. See Notice of Filing, supra note 3, at
74185.
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A. Changes to NSCC's Capital Requirements for Members and Limited
Members

i. Members
    U.S. Broker-Dealer Members: NSCC proposes to increase its minimum
excess net capital (``Excess Net Capital'') requirements for its U.S.
broker-dealer members.\11\ A comparison of NSCC's current and proposed
minimum Excess Net Capital requirements is as follows:
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    \11\ NSCC proposes to define ``Excess Net Capital'' as the net
capital greater than the minimum required, as calculated in
accordance with the broker-dealer's regulatory and/or statutory
requirements.

----------------------------------------------------------------------------------------------------------------
                                                                                Proposed
                                                                  ----------------------------------------------
            Clearing status                      Current                                   Minimum excess net
                                                                        VaR tier                capital
----------------------------------------------------------------------------------------------------------------
Self-Clearing.........................  $500,000.................           <$100,000  $1 million Excess Net
                                                                      100,000-500,000   Capital.
                                                                             >500,000  $2.5 million Excess Net
                                                                                Capital.
                                                                                $5 million Excess Net
                                                                                Capital.
Clears for others.....................  $1 million...............            <100,000  $2.5 million Excess Net
                                                                      100,000-500,000   Capital.
                                                                             >500,000  $5 million Excess Net
                                                                                Capital.
                                                                                $10 million Excess Net
                                                                                Capital.
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    As is the case with the current capital requirements applicable to
Registered Broker-Dealers, the enhanced capital requirements for U.S.
broker-dealers would depend on whether a member self-clears or clears
for others. NSCC states that a broker-dealer that clears transactions
for others has the potential to present different and greater risks to
NSCC than a broker-dealer that clears transactions only for itself
because it could clear for a large number of correspondent clients
(i.e., indirect participants), which would expand the scope and volume
of risk presented to NSCC and the direct participant itself when the
indirect participant's trades are submitted to NSCC for settlement via
the direct participant.\12\ The indirect nature of this risk exposure
also increases risk to NSCC as there is generally less transparency
into the indirect activity versus if the direct participant generated
all of the activity itself.\13\ NSCC states the proposed heightened
capital requirements for these members would help ensure that NSCC is
better able to manage the material risks to NSCC arising from these
arrangements.\14\
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    \12\ See Notice of Filing, supra note 3, at 74189.
    \13\ See id.
    \14\ See id.
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    Rather than continue to set fixed minimum capital requirements,\15\
NSCC proposes to implement a tiered approach based on the level of risk
the U.S. broker-dealer presents to NSCC, as measured by its daily
volatility component calculations. NSCC proposes to use, in general
terms, calculations from its value-at-risk (``VaR'') \16\ model and
associated Member charges as a measure of market risk in order to
categorize Members into those that pose relatively minimal risk
exposure, moderate risk exposure, or higher risk exposure to NSCC
(``VaR Tier''). The VaR Tiers would require those members that bring
more volatility (i.e., risk) into the clearinghouse to hold more
capital.
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    \15\ NSCC states, as background, that, in 2013, it considered
increasing the fixed minimum capital requirements to much higher
amounts, which was never proposed based on member feedback objecting
that such requirements would be too high, rigid, and burdensome. See
id. at 74186.
    \16\ A member's VaR Tier is based on its volatility charge,
which is one of the major components of its margin requirement and
which is calculated daily and collected at the start of each
business day. To calculate the volatility charge, NSCC uses a VaR
model, which provides an estimate of the maximum loss in a portfolio
assuming a 3 day time horizon and 99% confidence interval. See id.
at 74189.
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    NSCC states that this tiered approach is tailored to better reflect
the volatility risk presented by U.S. broker-dealer members.\17\
Currently, the minimum capital requirements for U.S. broker-dealers
only consider the risk of membership type (i.e., self clears or clears
for others), without considering any other risks. NSCC would continue
to consider membership type, but would also incorporate volatility risk
of the U.S. broker-dealer's own positions at NSCC (i.e., a measurement
of the risk that the member's transactions pose to NSCC) in order to
more strategically group U.S. broker-dealer Members into tiers, with
each tier being assigned a specific minimum capital requirement.\18\
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    \17\ See id. at 74196.
    \18\ See id.
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    Additionally, NSCC states that U.S. broker-dealer members with
lower Excess Net Capital tend to present greater relative risk to NSCC
based on NSCC's analysis of the current average VaR margin requirement
of each member divided by the current excess net capital of each member
(``VaR/ENC''), with this analysis done for each member within NSCC.\19\
Specifically, that analysis shows that members with excess net capital
of less than $5 million have an average VaR/ENC of 15 percent, which
moved to 13 percent for members with excess net capital of $5-10
million, to 10 percent for members with excess net capital of $10-50
million, to 3 percent for members with excess net capital of $50-100
million, to 7 percent for members with excess net capital of

$100-500 million, and, finally, to 2 percent for members with excess
net capital greater than $500 million.\20\
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    \19\ See Letter from Michael Leibrock, Managing Director,
Counterparty Credit Risk Management, DTCC, at 2-3 (March 10, 2022)
(``NSCC Response Letter'').
    \20\ See id.
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    NSCC also performed the same analysis to compare U.S. broker-dealer
members' VaR to their Excess Net Capital under the proposed new minimum
capital requirements, to understand the impact on this relationship
that the new minimum capital requirements would have. Based on this
analysis, NSCC states that if the proposed increase in Excess Net
Capital requirements had been applied, then the average VaR/ENC ratio
declines to 7 percent for members with excess net capital less than $5
million, and 9 percent for members with excess net capital of $5-10
million, which aligns more closely to members with greater excess net
capital.\21\ Thus, the analysis demonstrates that the risk to NSCC, as
measured through the VaR/ENC ratio, decreases and allows the risk to be
more consistent across all NSCC members.\22\ NSCC relied upon these
analyses, in conjunction with its analysis of the impact on its current
membership, to identify the proposed VaR tiers and the corresponding
minimum capital requirements, which it believes are reasonable.
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    \21\ See id. In addition, as part of the Proposed Rule Change,
NSCC filed Exhibit 3--NSCC Impact Studies, which provided analysis
on the rationale for and impact of the proposal. Pursuant to 17 CFR
240.24b-2, NSCC requested confidential treatment of Exhibit 3. The
confidential information provided more granular support for this
analysis, and it includes a detailed analysis of the impact of each
proposed minimum capital requirement on the current membership of
NSCC, by category, looking at the members' current VaR over the
preceding twelve months as compared to their capital levels. NSCC
performed this analysis on a member-by-member basis, using each
member's actual historical VaR data (based on their particular
activity at NSCC) and ENC levels, and provided that member-level
information to the Commission, both to identify which members would
be impacted by the proposal and to show the differences in VaR/ENC
ratio for each member under both the current and proposed minimum
capital requirements.
    \22\ In addition, NSCC stated that it analyzed stress testing
results, which showed that broker-dealer members with smaller
capital bases are exposed to the risk of losses exceeding their
current Excess Net Capital requirements under a stressed scenario.
Notice, supra note 3, at 74196. NSCC also included the stress
testing results as part of the confidential Exhibit 3 referenced in
note 21 supra.
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    As part of the tiered approach, a member's daily volatility
component may exceed its then-current VaR Tier four times over a
rolling 12-month period.\23\ Upon the fifth instance, the member would
be moved to the next-greatest VaR Tier.\24\ The member would then have
60 calendar days from that date to meet the higher required minimum
Excess Net Capital for that VaR Tier and would remain in that greater
VaR Tier for no less than one continuous year from the date of the move
before being eligible to move to a lesser VaR Tier. NSCC states that
U.S. broker-dealer members could move between tiers based on sustained
changes to their daily volatility component, thus allowing them to have
control over the tier in which they are placed and, in turn, the
capital they need to maintain.\25\
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    \23\ The VaR Tiers were designed to capture the VaR Tier that
each member falls into approximately 99% of the time. See supra note
15. Given there are approximately 252 trading days per year, the
firm would fall below the 99% if it exceeded its current VaR Tier on
more than two trading days in a rolling 12 month period. See Notice
of Filing, supra note 3, at 74197.
    \24\ However, if the member's daily volatility component also
exceeded such next-greatest VaR Tier five times during the preceding
12-month period, the member would be moved to the greatest VaR Tier.
    \25\ See Notice of Filing, supra note 3, at 74197.
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    Newly admitted members would be placed into the applicable middle
VaR Tier in the table above, unless NSCC determines, based on
information provided by or concerning the member's anticipated trading
activity, that the member should be placed into the greatest VaR Tier.
The new member would remain in the initial tier for the first 12 months
of membership before being eligible to move to the lower VaR Tier.
    NSCC states that, based on its historical experience with the daily
volatility components of newly admitted Members including such Members'
own projected trading activity,\26\ it would be appropriate to place
newly admitted Members into the applicable middle VaR Tier in the table
above for the first 12 months of membership unless NSCC has determined
that the Member's anticipated VaR Tier based on its anticipated trading
activity would be the greatest VaR Tier.\27\
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    \26\ For example, if the proposed VaR Tiers had been in effect
for the past two years (but newly admitted Members were not
automatically placed in at least the middle VaR Tier), only one U.S.
broker-dealer applicant would have belonged in the lowest VaR Tier
at admittance, but that firm then had trading activity that placed
it in the middle VaR Tier in the first month and the highest VaR
Tier in the second month of membership. See id. at 74190. NSCC
provided more granular support for this analysis on a confidential
basis. See supra notes 19-21.
    \27\ See Notice of Filing, supra note 3, at 74190.
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    U.S. Bank and Trust Company Members: For members who are U.S. banks
or U.S. trust companies who are also banks,\28\ NSCC proposes to (1)
change the capital measure from equity capital to common equity tier 1
capital (``CET1 Capital''),\29\ (2) raise the minimum capital
requirements from $50 million in equity capital to $500 million in CET1
Capital, and (3) require such members to be well capitalized (``Well
Capitalized'').\30\ Under the proposal, a member may satisfy these
requirements if the member's parent holding company maintains the
minimum capital requirements and guarantees the member's obligations to
NSCC. The proposal would align NSCC's capital requirements with banking
regulators' changes to regulatory capital requirements over the past
several years, which have standardized and harmonized the calculation
and measurement of bank capital and leverage throughout the world.\31\
Consistent with these changes by banking regulators, NSCC states that
it believes that the appropriate capital measure for members that are
U.S. banks and trust companies should be CET1 Capital and that NSCC's
capital requirements for Members should be enhanced to be consistent
with these increased regulatory capital requirements.\32\ NSCC further
states that it believes the proposed capital requirement for banks
better measures the capital available to bank members to absorb losses
arising out of their clearance and settlement activities at NSCC or
otherwise, and would help NSCC more effectively manage and mitigate the
credit risks posed by its members while providing fair and open access
to membership at NSCC.\33\
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    \28\ For U.S. trust companies who are not banks, NSCC is not
changing its existing capital requirement of $10 million.
    \29\ NSCC proposes to define ``CET1 Capital'' as an entity's
common equity tier 1 capital, calculated in accordance with such
entity's regulatory and/or statutory requirements.
    \30\ NSCC proposes to incorporate the definition of ``Well
Capitalized'' as that term is defined by the Federal Deposit
Insurance Corporation in its capital adequacy rules and regulations.
See 12 CFR 324.403(b)(1).
    \31\ See Notice of Filing, supra note 3, at 74190. NSCC further
states that it believes these enhanced capital requirements better
measure the capital available to members to absorb losses arising
out of their clearance and settlement activities at NSCC or
otherwise and would help NSCC more effectively manage and mitigate
the credit risks posed by its members while providing fair and open
access to membership at NSCC. See id. at 74194.
    \32\ See id.
    \33\ See id. NSCC also provided, in the confidential information
submitted as part of this proposed rule change, an analysis of U.S.
banks' capital to determine the appropriate level of capital
requirement.
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    Additionally, NSCC states that requiring U.S. banks and trust
companies to be Well Capitalized ensures that Members are well
capitalized while also allowing CET1 Capital to be relative to either
the risk-weighted assets or average total assets of the bank or trust
company.\34\ NSCC

further states that expressly tying the definition of Well Capitalized
to the FDIC's definition of ``well capitalized'' will ensure that the
proposed requirement keeps pace with future changes to regulatory
capital requirements.\35\
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    \34\ See id.
    \35\ See id.
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Non-U.S. Broker-Dealer and Bank Members
    Currently, a Member who is a non-U.S. broker-dealer or bank is
subject to a multiplier that requires such Member to maintain capital
of either 1.5, 5, or 7 times its otherwise-applicable capital
requirements.\36\
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    \36\ The applicable multiplier is based on which generally
accepted accounting standards (``GAAP'') the non-U.S. Member uses to
prepare its financial statements, when not prepared in accordance
with U.S. GAAP. See Addendum O of the Rules, supra note 7.
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    Non-U.S. Broker-Dealers: NSCC proposes to require non-U.S. broker-
dealer members to maintain a minimum of $25 million in total equity
capital. NSCC states the multiplier was designed to account for the
less transparent nature of accounting standards other than U.S.
GAAP.\37\ However, given that accounting standards have converged over
the years, NSCC no longer believes the multiplier is necessary and its
retirement would be a welcomed simplification for both NSCC and its
members.\38\
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    \37\ See id. at 74191.
    \38\ See id. at 74191.
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    Additionally, NSCC states its approach to managing credit risk is
multifaceted, which includes requirements of operational capability in
addition to financial responsibility.\39\ Based on its experience, NSCC
believes the flat equity capital requirement is warranted for non-U.S.
broker-dealers based on the added jurisdictional and regulatory risks,
while still allowing for fair and open access to NSCC membership.\40\
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    \39\ NSCC Response Letter, supra note 19, at 2.
    \40\ See Notice of Filing, supra note 3, at 74195.
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    Non-U.S. Banks: Like U.S. bank members, NSCC proposes that non-U.S.
bank members maintain at least $500 million in CET1 Capital. NSCC
proposes additional requirements for non-U.S. bank members as follows:
(1) comply with the greater of (i) the member's home country minimum
capital and ratio requirements, or (ii) the minimum capital and ratio
standards promulgated by the Basel Committee on Banking
Supervision,\41\ (2) provide an attestation for itself, its parent
bank, and its parent bank holding company detailing the minimum capital
requirements and capital ratios required by their home country
regulator,\42\ and (3) notify NSCC of (i) any breach of its minimum
capital and ratio requirements within two Business Days, or (ii) any
changes to its requirements within 15 calendar days. Like U.S. bank
members, NSCC proposes that a non-U.S. bank member may satisfy these
requirements if the member's parent holding company maintains the
minimum capital and other requirements and guarantees the member's
obligations to NSCC.
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    \41\ See Basel Committee on Banking Supervision, The Basel
Framework, available at https://www.bis.org/basel_framework/index.htm?export=pdf. NSCC states that the proposal will align
NSCC's capital requirements with banking regulators' changes to
regulatory capital requirements over the past several years, which
have standardized and harmonized the calculation and measurement of
bank capital and leverage throughout the world. See Notice of
Filing, supra note 3, at 74190. See also supra note 30. NSCC
proposes tying its minimum requirement to the requirements
promulgated by the Basel Committee on Banking Supervision to ensure
that its non-U.S. bank members meet minimum international standards
where their home country requirements may be more lenient.
    \42\ NSCC also proposes to require non-U.S. bank members to
periodically provide new attestations on at least an annual basis
and upon request by NSCC.
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Other Types of Members
    Currently, an entity applying to be a Member other than a
Registered Broker-Dealer, bank or trust company is required to satisfy
such minimum standards of financial responsibility as determined by
NSCC. NSCC proposes to adopt more specific standards for different
member types.
    Securities Exchanges: Currently, NSCC does not provide a capital
requirement standard for national securities exchanges. NSCC proposes
to require that a Member that is a national securities exchange
registered under the Exchange Act and/or a non-U.S. securities exchange
or multilateral trading facility must have and maintain at all times at
least $100 million in equity capital. There are only a few exchanges
that are members of NSCC. These exchanges became members many years ago
to address a processing structure that is no longer in place at
NSCC.\43\ An exchange does not need to be a member of NSCC to submit
trades of NSCC members for clearance and settlement, and NSCC does not
anticipate that any other exchanges would seek to become members.\44\
NSCC is proposing these new capital requirements to address the
potential credit risk posed by the current exchange members due to the
systemic importance of these members and the need to hold these members
to a consistent, high standard to ensure that they have sufficient
capital to fulfill their systemically important role.\45\
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    \43\ NSCC Response Letter, supra note 19, at 6.
    \44\ See id.
    \45\ See Notice of Filing, supra note 3, at 74192.
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    Index Receipt Agent: Currently, NSCC does not provide a capital
requirement standard for Index Receipt Agents, which are exchange-
traded funds agents that serve a number of functions in the create/
redeem process. NSCC proposes to require that a broker-dealer member
that is acting as an Index Receipt Agent must have and maintain at all
times minimum Excess Net Capital of $100 million. NSCC states that this
aspect of the proposal would reflect the systemic risk presented by the
potential failure of an Index Receipt Agent. The failure of an Index
Receipt Agent could present systemic risk because such failure could
potentially result in disruptions at exchange-traded funds for which
the Index Receipt Agent acts. As a result of this systemic risk, NSCC
proposes to require Members acting as Index Receipt Agents to hold a
moderately sized capital base to support this business function.
    All Other Members: For all other members, NSCC proposes that the
Member must maintain compliance with its home country's minimum
financial requirements. NSCC also proposes that it may, based on the
information provided or concerning the Member, assign an additional
minimum financial requirement to the Member, which it will determine
based on how closely it resembles another membership type and its risk
profile.\46\
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    \46\ Under the proposal, NSCC would be obligated to promptly
notify and discuss any additional minimum financial requirement with
the member applicant or member.
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ii. Limited Members
    Limited Members are authorized to use only certain specified NSCC
services, as compared to Members who may generally access all NSCC
services.\47\ Currently, a Limited Member that is a Mutual Fund/
Insurance Services Member and/or Fund Member that is a U.S. bank or
trust company is required to have a Tier 1 risk based capital (``RBC'')
ratio of 6% or greater.\48\ Additionally, Settling Bank Only Members
are currently subject to standards of financial responsibility that
NSCC may promulgate.\49\
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    \47\ See Section 2 of Rule 2 of the Rules, supra note 7.
    \48\ See Sections 2.B.2 and 3.B.2 of Addendum B of the Rules,
supra note 7.
    \49\ See Section 7.B of Addendum B of the Rules, supra note 7.
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    NSCC proposes that these types of members must maintain a Tier 1
RBC

ratio (``Tier 1 RBC Ratio'') \50\ equal to or greater than the Tier 1
RBC Ratio that would be required for such members to be Well
Capitalized. NSCC proposes to have the definition of Well Capitalized
expressly tied to the FDIC's definition of ``well capitalized.'' \51\
NSCC states that by tying its definition of ``Well Capitalized'' to
that of the FDIC's definition, NSCC will ensure that the proposed
requirement will keep pace with future changes to banking regulators'
regulatory capital requirements.\52\
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    \50\ NSCC proposes to define ``Tier 1 RBC Ratio'' as the ratio
of an entity's tier 1 capital to its total-risk weighted assets,
calculated in accordance with such entity's regulatory and/or
statutory requirements. NSCC is not proposing changes to its capital
requirements for U.S. trust companies that do not calculate its Tier
1 risk-based capital ratio, which is currently $2 million in equity
capital. See Sections 2.B.2 and 3.B.2 of Addendum B of the Rules,
supra note 7.
    \51\ See supra note 29.
    \52\ See Notice of Filing, supra note 3, at 74192.
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iii. Implementation Timeframe
    NSCC proposes to implement the proposed changes to its membership
capital requirements one year after the Commission's approval of the
Proposed Rule Change.\53\ During the one-year period, NSCC would
periodically provide members with an estimate of their capital
requirements based on the proposal.\54\
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    \53\ The changes to NSCC's Watch List and enhanced surveillance
list discussed in Section II.B below will not be subject to the one
year delayed implementation.
    \54\ See Notice of Filing, supra note 3, at 74193.
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B. Changes to NSCC's Watch List and Enhanced Surveillance List

    NSCC currently uses two credit risk monitoring systems: a Watch
List and a separate list of members subject to enhanced surveillance
(``enhanced surveillance list''). The current Watch List includes
members that have either (1) receive a heightened credit risk rating
based on NSCC's Credit Risk Rating Matrix (``CRRM''),\55\ or (2) been
deemed to pose a heightened credit risk to NSCC or other members.\56\
NSCC may require a member placed on the Watch List to post additional
collateral above the member's margin calculated pursuant to NSCC's
margin methodology.\57\ Members on the Watch List are also subject to
more thorough monitoring by NSCC of its financial condition and
operational capability.\58\
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    \55\ NSCC members generally are subject to the CRRM, in which
each member is rated on a scale of one to seven with seven
reflecting the highest credit risk posed to NSCC. Members who
receive a CRRM rating of five to seven are currently, automatically
placed on the Watch List. See Rule 1 and Section 4(b) of Rule 2B of
the Rules, supra note 7.
    \56\ See Rule 1 and Sections 4(b)(ii) and (c) of Rule 2B of the
Rules, supra note 7. In making its determination, NSCC may consider
any information NSCC obtains through continuously monitoring its
members for compliance with its membership requirements. See Section
4(d) of Rule 2B of the Rules, supra note 7.
    \57\ See Section 4(e) of Rule 2B and Procedure XV of the Rules,
supra note 7.
    \58\ See Section 4(f) of Rule 2B of the Rules, supra note 7.
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    NSCC also maintains a separate enhanced surveillance list, which
includes members who are subject to a more thorough monitoring of its
financial condition and operational capability based on NSCC's
determination that the member poses heightened credit risks, which may
include members already on or soon to be on the Watch List.\59\ Members
on the enhanced surveillance list are reported to NSCC's management
committees, are regularly reviewed by NSCC senior management, and may
be required to make more frequent financial disclosures to NSCC.\60\
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    \59\ See id.
    \60\ See id.
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    NSCC believes that maintaining two separate lists has confused
various NSCC stakeholders,\61\ so NSCC proposes to remove references to
an enhanced surveillance list from its Rules.\62\ NSCC also proposes to
remove members with a CRRM rating of five from being automatically
included on the Watch List. NSCC states that members with a CRRM rating
of five represent the largest single CRRM rating category, but NSCC
does not believe all such members present heightened credit
concerns.\63\ NSCC would still retain the authority to place a member
with a CRRM rating of five on the Watch List or otherwise if NSCC deems
the member poses a heightened risk to NSCC. NSCC believes that these
procedures would allow it to appropriately monitor the credit risks
presented to it by its members and that the enhanced surveillance list
is not necessary because members on the enhanced surveillance list are
subject to the same potential consequences as members placed on the
Watch List.\64\
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    \61\ See Notice of Filing, supra note 3, at 74193.
    \62\ For any members currently on the enhanced surveillance list
that are not also on the Watch List, NSCC will add these members to
the Watch List. See id. at 74193. NSCC also proposes to clarify in
its Rules that members on the Watch List are reported to NSCC's
management committees and regularly reviewed by NSCC's senior
management.
    \63\ See id. at 74193. NSCC states that the majority of members
with a CRRM rating of 5 are either rated ``investment grade'' by
external rating agencies or, in the absence of external ratings,
NSCC believes are equivalent to investment grade, as many of these
members are primary dealers and large foreign banks. See id.
    \64\ See id. at 74188, 74193.
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C. Other Changes

    NSCC proposes to (1) revise or add headings and sub-headings as
appropriate, (2) revise defined terms and add appropriate defined terms
to facilitate the proposed changes, (3) rearrange and consolidate
paragraphs to promote readability, (4) fix typographical and other
errors, and (5) make specified other changes in order to improve
clarity and the accessibility and transparency of the Rules.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \65\ provides that the Commission
shall approve a proposed rule change of a self-regulatory organization
if it finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After careful review of the Proposed Rule Change
and consideration of the comments on the proposal, the Commission finds
that the Proposed Rule Change is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to NSCC. In
particular, the Commission finds that the Proposed Rule Change is
consistent with Sections 17A(b)(3)(F) and (b)(3)(I) of the Act,\66\ and
Rules 17Ad-22(e)(4) and (e)(18) thereunder,\67\ for the reasons
described below.
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    \65\ 15 U.S.C. 78s(b)(2)(C).
    \66\ 15 U.S.C. 78q-1(b)(3)(F) and (b)(3)(I).
    \67\ 17 CFR 240.17Ad-22(e)(4) and (e)(18).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions, assure
the safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible, and
protect investors and the public interest; and are not designed to
permit unfair discrimination in the admission of participants or among
participants in the use of the clearing agency.\68\ Based on its review
of the record, the Commission finds that the proposal is consistent
with Section 17A(b)(3)(F) of the Act.\69\
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    \68\ 15 U.S.C. 78q-1(b)(3)(F).
    \69\ One commenter argues, in part, that the proposal to
increase NSCC's membership capital requirements violates the
requirement under Section 17A(b)(3)(F) of the Act to remove
impediments to and perfect the mechanism of a national system for
the prompt and accurate clearance and settlement of securities
transactions. See Comment from Robert McBey, Chief Executive
Officer, Wilson-Davis Co., Inc. (February 3, 2022) (``Wilson
Letter''), supra note 8, at 6-7. See also 15 U.S.C. 78q-1(b)(3)(F).
NSCC is not changing the process in which it clears and settles
securities transactions submitted by its members, and, therefore,
these requirements are not affected by this Proposed Rule Change.

---------------------------------------------------------------------------

i. Prompt and Accurate Clearance and Settlement and Safeguarding of
Securities and Funds
    The Commission believes that the proposal is designed to promote
the prompt and accurate clearance and settlement of securities
transactions, and assure the safeguarding of securities and funds which
are in the custody or control of NSCC. The Commission believes that
membership standards at covered clearing agencies should seek to limit
the potential for member defaults and, as a result, losses to non-
defaulting members in the event of a member default. As the Commission
stated when adopting the Covered Clearing Agency Standards, using risk-
based criteria helps to protect investors by limiting the participants
of a covered clearing agency to those for which the covered clearing
agency has assessed the likelihood of default.\70\ More specifically,
the Commission believes that membership standards related to minimum
capital requirements serve as one tool in limiting this default risk by
ensuring that members have sufficient capital to meet its obligations
and to absorb losses.
---------------------------------------------------------------------------

    \70\ See Securities Exchange Act Release No. 78961 (September
28, 2016), 81 FR 70786, 70839 (October 13, 2016) (S7-03-14)
(``Covered Clearing Agency Standards'').
---------------------------------------------------------------------------

    Covered clearing agencies employ membership standards as the first
line of defense in their risk management, ensuring that its members,
among other things, hold sufficient financial resources to meet the
obligations that they may incur as a member of the covered clearing
agency. These requirements are separate from the collection of margin,
which addresses the risk of the cleared transactions. Instead, capital
requirements seek to ensure that NSCC has sufficiently addressed the
member's counterparty credit risk, that is, that the member has
sufficient financial resources both to meet its margin requirements or
potential loss allocation in the event of a member default; these
requirements are not a substitute for margin.
    The Commission believes that NSCC's proposal to increase its
minimum capital requirements for its members, as described above in
Section II.A, is designed to strengthen its risk management practices.
For example, NSCC proposes to increase the minimum capital requirements
for U.S. broker dealer members based on the member's VaR Tier. The
Commission believes that members with a higher VaR as compared to their
excess net capital may pose more credit risk to NSCC, and therefore
that the revised minimum capital requirements are appropriate to
address this risk. Specifically, the Commission reviewed and analyzed
confidential impact data NSCC provided to the Commission as part of the
Proposed Rule Change regarding the VaR/ENC ratio, including the impact
that the proposed minimum capital requirements would have on that
ratio.\71\ The Commission agrees with NSCC's analysis of that data that
these minimum requirements result in VaR/ENC ratios that are more
consistent across NSCC's membership, meaning that the risk posed to
NSCC by members would decrease, and based, in part, on that analysis,
and taking into account the other factors discussed further below, the
Commission believes that the proposed minimum capital requirements are
a reasonable method of addressing NSCC's need to manage the risks posed
by its members,\72\ as a balance between strengthened capital
requirements and the impact on NSCC's members, which, as discussed
further below, is limited to a very small subset of the members.\73\
For most other members, the changes would increase the minimum capital
requirements and ensure that members, such as U.S. and foreign bank
members, would continue to hold sufficient financial resources
consistent with those requirements and their applicable regulatory
obligations, although they would not actually increase the amounts held
as the members generally meet the new requirements already based on
their current capital.
---------------------------------------------------------------------------

    \71\ See supra note 21 for a detailed description of the
confidential impact study.
    \72\ See supra notes 19-21.
    \73\ See supra note 83.
---------------------------------------------------------------------------

    The Commission also considered other factors as support for its
determination that these proposed minimum capital requirements are
reasonable. The Commission understands that NSCC has not revised these
requirements in over 20 years. During that time, the Commission
recognizes that there have been significant changes to the financial
markets, such as new risks arising from cyber threats and online
trading technologies, and heightened operational risk due to a more
sophisticated and complex business environment. In addition, the
Commission understands that NSCC considered several factors, including
inflation and the capital requirements of other financial market
infrastructures, and the Commission agrees that these factors support
the reasonableness of the proposed minimum capital requirements.\74\
For example, the value of the current $500,000 minimum capital standard
at the point in time when established twenty years ago is far less
today in inflation-adjusted terms.\75\ Further, the Commission believes
that the consistency between the proposed requirements and those of
other financial market infrastructures tends to indicate that such
requirements should address the obligations attendant to participating
in a financial market infrastructure like NSCC, i.e., that they are
tailored to ensure that a member can meet its requirements to NSCC in
the event of, for example, a loss allocation or an intraday margin
call. Finally, based on its supervisory experience, the Commission
understands that trading volume, in terms of both number of
transactions and notional value, have increased significantly across
the NSCC membership during that time period.\76\ The Commission
believes that this significant increase in trading volumes represents
additional risk for NSCC and supports the need for the proposed minimum
capital requirements. Taken together, the Commission believes that
these factors support its determination regarding the reasonableness of
the proposed minimum capital requirements, as they would allow NSCC to
ensure that its members have capital sufficient to address the risks
posed by their activities in addition to the margin for particular
transactions.
---------------------------------------------------------------------------

    \74\ See Notice, supra note 3, at 74186, (citing, e.g., The
Options Clearing Corporation, OCC Rules, Rule 301(a), available at
https://www.theocc.com/Company-Information/Documents-and-Archives/ByLaws-and-Rules (requiring broker-dealers to have initial net
capital of not less than $2,500,000); Chicago Mercantile Exchange
Inc., CME Rulebook, Rule 970.A.1, available at https://www.cmegroup.com/rulebook/CME/I/9/9.pdf (requiring clearing members
to maintain capital of at least $5 million, with banks required to
maintain minimum tier 1 capital of at least $5 billion).
    \75\ See, e.g., https://data.bls.gov/cgi-bin/cpicalc.pl.
    \76\ See, e.g., DTCC Annual Reports, available at https://www.dtcc.com/about/annual-report, and CPMI-IOSCO Quantitative
Disclosures for NSCC, section 23.1 (setting forth daily average
volumes by asset class and average notional value), available at
https://www.dtcc.com/legal/policy-and-compliance.
---------------------------------------------------------------------------

    Through these changes, NSCC should be able to ensure members have
sufficient capital to meet their obligations and to absorb losses,
which could further limit the potential for a member default. In turn,
limiting the potential for a member default should promote the prompt
and accurate

clearance and settlement of securities transactions.
    In addition, NSCC's proposed minimum capital requirements would
thereby further limit potential losses to non-defaulting members in the
event of a member default,\77\ which helps assure the safeguarding of
securities and funds which are in the custody or control of NSCC.
---------------------------------------------------------------------------

    \77\ Under NSCC's rules, when a member defaults, NSCC may
allocate losses to non-defaulting losses in the event that the
defaulting member's own margin and other resources at NSCC, as well
as NSCC's corporate contribution, are not sufficient to cover the
loss. See section 4 of Rule 4 of NSCC's Rules, supra note 7. If
members hold capital sufficient to allow them to meet their
obligations to NSCC, such losses are less likely to occur.
---------------------------------------------------------------------------

    Additionally, the Commission believes NSCC's proposal to streamline
its credit risk monitoring systems into one Watch List, as described
above in Section II.B., would eliminate existing confusion and should
enhance NSCC's efficiency in monitoring its members' credit risk by
focusing on only those members that present heightened credit risk.
Similarly, the Commission believes NSCC's proposal to make clarifying
and transparency changes, as described above in Section II.C., would
remove ambiguity and ensure NSCC's Rules are clear and accurate, which
would help ensure NSCC's members understand its obligations to NSCC and
NSCC's clearance and settlement activities. Therefore, the Commission
believes these changes should promote the prompt and accurate clearance
and settlement of securities transactions.
ii. Protection of Investors and the Public Interest
    The Commission believes that NSCC's proposal to increase the
capital requirements applicable to its members would protect investors
and the public interest. As discussed above in Section III.A.1, the
Commission believes the proposal is designed to strengthen NSCC's risk
management practices. Because a defaulting member could place stresses
on NSCC with respect to NSCC's ability to meet its clearance and
settlement obligations upon which the broader financial system relies,
it is important that NSCC has strong membership requirements to ensure
that its members are able to meet their obligations. By reducing the
risk of a member default and any subsequent allocation of losses, the
proposal should help to protect investors and the public interest by
helping to ensure that investors' securities transactions are cleared
and settled promptly and accurately and to assure the safeguarding of
securities and funds which are in NSCC's custody or control.
    One commenter argues that the Proposed Rule Change contravenes the
protection of investors and the public interest because smaller firms
may be unable to meet these membership requirements, thereby harming
the ability of investors and small businesses that access the markets
through these smaller firms.\78\ The Commission disagrees. First, the
Commission believes that the improved risk management at NSCC is
consistent with protecting investors and the public interest. Second,
the Commission disagrees that the potential inability of a very small
subset of NSCC's membership to meet the proposed membership
requirements would necessarily mean that investors and small businesses
would not be able to access the markets and raise capital, through
other brokers or market participants. Most smaller broker-dealer
members of NSCC would, in fact, meet the proposed membership
requirements, as well as other broker-dealers that serve small
investors.
---------------------------------------------------------------------------

    \78\ See Wilson Letter, supra note 8, at 7-8 (stating that
``[i]f the only firms that service retail investors and main street
businesses are unable to meet NSCC's ever escalating capital
requirements, investors holding microcap stock will be unable to
liquidate their investments, and small businesses will be unable to
raise money, contribute to the U.S. economy, and provide jobs to
fellow Americans.'').
---------------------------------------------------------------------------

iii. Prohibit Unfair Discrimination
    Three commenters argue that the Proposed Rule Change related to
increasing the minimum Excess Net Capital requirements for U.S. broker-
dealer members is designed to unfairly discriminate against smaller
broker-dealers.\79\ These commenters generally state that the proposal
disproportionately impacts smaller broker-dealers and, therefore, is
intended to deny these smaller broker-dealers' membership at NSCC.\80\
The Commission disagrees with this view.
---------------------------------------------------------------------------

    \79\ See id. at 8-9; Comment from Aaron D. Lebenta, Parsons
Behle Leibrock, P.C., Counsel for Alpine Securities Corporation
(January 19, 2022) (``Alpine Letter''), supra note 8, at 1-2 and 5-
6; and Comment from Patrick Zakhary, Esq., Seyfnia and Zakhary, P.C.
(February 7, 2022) (``Zakhary Letter''), supra note 8, at 1.
    \80\ See id.
---------------------------------------------------------------------------

    First, NSCC's proposal to increase its minimum capital requirements
would apply to all members and is not limited to small U.S. broker-
dealers.\81\ The impact of the proposal on U.S. broker-dealers is
determined by the risks that the member presents to NSCC through the
type of clearing activity and the transactions cleared, rather than the
member's size. The Commission understands, based on its review and
analysis of the record,\82\ that, out of NSCC's 146 members (including
bank members, broker-dealer members, etc.), only a few U.S. broker-
dealer members would likely be impacted by the proposal (i.e., would
need to raise additional capital to meet NSCC's proposed increased
capital requirements).\83\ The vast majority of NSCC's members,
including some small U.S. broker-dealers, already meet NSCC's proposed
minimum capital requirements. Therefore, the Commission does not
believe that NSCC's proposal is intended to exclude smaller broker-
dealers from its membership.
---------------------------------------------------------------------------

    \81\ The proposed increases would be between 2 and 10 times
NSCC's current minimum Excess Net Capital requirements, across all
U.S. broker-dealer members. Moreover, the increase is not limited to
U.S. broker-dealer members; for example, NSCC also proposes
increasing its minimum capital requirement for members that are U.S.
banks to 10 times the current requirement.
    \82\ Specifically, the Commission reviewed and analyzed
confidential impact data NSCC provided to the Commission as part of
the Proposed Rule Change. See supra notes 19-21.
    \83\ NSCC has 146 members, which consists of 14 bank members and
132 other members, the vast majority of which are broker dealer
members. 144 members are based in the United States, while two
members are non-U.S. based. See The Depository Trust and Clearing
Corporation, CPMI IOSCO Quantitative Disclosure Results 2022 Q1
(``Q1 Quantitative Disclosures'') (June 6, 2022), available at
https://www.dtcc.com/legal/policy-and-compliance.
---------------------------------------------------------------------------

    Second, the Commission believes that, based on its analysis of the
data,\84\ on average broker-dealers with lower Excess Net Capital
amounts present higher risk exposures to NSCC relative to their capital
levels. The Commission further believes the proposal would more closely
align the excess net capital requirements for these broker-dealers
members to the broker-dealer members that are required to hold excess
net capital above the minimum required, which, as discussed above,
means that such broker-dealers would pose less risk to NSCC.\85\
---------------------------------------------------------------------------

    \84\ See supra notes 19-21. See also, supra text accompanying
note 71.
    \85\ Based on its review of the confidential impact study data,
the Commission notes that, if the proposed VaR tiers had been
applied to that analysis, then the average VaR/ENC ratio declines to
7 percent for members with excess net capital less than $5 million,
and 9 percent for members with excess net capital of $5-10 million,
which aligns more closely to the class of members with greater
excess net capital. See also NSCC Response Letter, supra note 19, at
3.
---------------------------------------------------------------------------

    By implementing a tiered approach, as described above in Section
II.A.1., the Commission believes NSCC's proposal is designed to
increase the minimum Excess Net Capital requirements for its U.S.
broker-dealer members in relation to the level of risks those members
present to NSCC. The tiered approach should facilitate the continued
access by

less capitalized firms, while protecting NSCC and its members from
losses arising from a member default. Furthermore, by placing newly
admitted members in the middle-tier, the proposal should facilitate
entry into NSCC membership by less capitalized firms, while allowing
NSCC to manage the risk of those members' trading activity which has
not yet been established, which will help protect NSCC and its members
from the risks of those members defaulting. Therefore, the Commission
concludes the proposal does not disproportionately impact smaller
broker-dealers.
    For the reasons discussed in this Sections III.A., the Commission
believes that the Proposed Rule Change is consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\86\
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Section 17A(b)(3)(I) of the Act

    Section 17A(b)(3)(I) of the Act requires that the rules of a
clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the Act.\87\ This provision does not
require the Commission to find that a proposed rule change represents
the least anticompetitive means of achieving the goal.\88\ Rather, it
requires the Commission to balance the competitive considerations
against other relevant policy goals of the Act.\89\
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78q-1(b)(3)(I).
    \88\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105
(D.C. Cir. 1978).
    \89\ See id.
---------------------------------------------------------------------------

    The Commission acknowledges the proposal could pose a burden on
competition for those broker-dealer members who would be required to
raise additional capital to meet the proposed increases in minimum
Excess Net Capital requirements. However, the Commission believes that
this burden is appropriate. As discussed further below in Section
III.D, NSCC is required to have policies and procedures reasonably
designed to ensure that it has risk-based, objective, and publicly
disclosed criteria for participation. The proposed capital requirements
meet this standard.
    Several commenters argue that this burden on competition is not
necessary or appropriate in furtherance of the Act for two reasons.\90\
First, commenters argue that NSCC has not provided sufficient evidence
that the proposed increases are necessary or appropriate.\91\ Second,
commenters argue that NSCC's proposed tiered approach is redundant and
therefore unnecessary and inappropriate.\92\ The Commission is not
persuaded by these arguments.
---------------------------------------------------------------------------

    \90\ See Alpine Letter, supra note 8, at 3-8; Comment from
Kimberly Unger, Chief Executive Officer and Managing Director, STANY
The Security Traders Association of New York, Inc. (January 27,
2022) (``STANY Letter''), supra note 8, at 2-3; Wilson Letter, supra
note 8, at 8; Letter from Scott G. Monson, Attorney (February 10,
2022) (``Monson Letter''), supra note 8, at 2. In addition, one
commenter stated that the proposal is anti-competitive in nature
because newly admitted broker-dealers will be placed in the middle
VaR Tier. See STANY Letter, supra note 8, at 5. The Commission
believes that such proposal is reasonable because a newly admitted
member would not have a historical VaR record, which NSCC needs to
assign an appropriate VaR Tier.
    \91\ See Alpine Letter, id. at 7-8; STANY Letter, id. at 4-5;
Wilson Letter, id. at 4; Monson Letter, id. at 2-3; and Zakhary
Letter, supra note 8, at 1-3.
    \92\ See id.
---------------------------------------------------------------------------

    First, as discussed above in Section III.A.iii., the Commission
believes that the proposed capital requirements should help ensure that
NSCC provides prompt and accurate clearance and settlement. The record
shows that on average broker-dealer members with lower Excess Net
Capital amounts present higher risk exposures to NSCC relative to their
capital levels.\93\ Second, the Commission believes that the risk being
addressed by capital requirements, and membership requirements more
broadly, is separate from the risks that are addressed through the
collection of margin on the particular transactions cleared and settled
at NSCC. The Commission believes capital requirements are used to help
manage counterparty credit risk and, in part, measure a member's
ability to meet its future obligations that could help prevent the
member's default.\94\ Collateral requirements (i.e., margin), on the
other hand, are used to help mitigate losses to NSCC and non-defaulting
members resulting from NSCC's closeout of a defaulting member's
positions, which is measured by NSCC's market risk exposure to that
member's open trading portfolio.\95\ Consequently, the proposal would
not be duplicating NSCC's existing risk management practices related to
its margin calculations.
---------------------------------------------------------------------------

    \93\ See supra notes 19-21 and accompanying text.
    \94\ See Covered Clearing Agency Standards, supra note 68, at
70859.
    \95\ See id. at 70855.
---------------------------------------------------------------------------

    On balancing the proposal's competitive considerations, the
Commission believes that only a few broker-dealer members will be
impacted by the proposal.\96\ Therefore, the Commission believes that
the proposal will help strengthen NSCC's credit risk management
practices by increasing the minimum Excess Net Capital requirements for
broker-dealer members tied to the level of risk these members present
to NSCC, which is both necessary and appropriate in furtherance of the
Act.
---------------------------------------------------------------------------

    \96\ See supra text accompanying notes 78-79.
---------------------------------------------------------------------------

    Furthermore, to give impacted members time to prepare, NSCC
proposes to provide its members a one year implementation period to
monitor their risk levels and to comply with the increased capital
requirements. In addition, the Commission understands that, in setting
the proposed amounts, NSCC considered several benchmarking factors,
including inflation, the proposal's historical development indicating
member appetite for different methods in setting the minimums, and the
capital requirements of other financial market infrastructures, which
provided indicators for setting appropriate increases to its minimum
capital requirements.\97\ As discussed above in Section III.A.i, the
Commission agrees that these factors support the reasonableness of the
proposed minimum capital requirements. Based on the totality of the
factors, the Commission concludes that the Proposed Rule Change does
not impose any burden on competition not necessary or appropriate in
furtherance of the Act.
---------------------------------------------------------------------------

    \97\ See Notice of Filing, supra note 3, at 74186.
---------------------------------------------------------------------------

    For the reasons stated above, notwithstanding the potential impact
on a small number of broker-dealers, the Commission believes that, in
light of the potential benefits to investors arising from the Proposed
Rule Change and the resulting overall improved counterparty credit risk
management at NSCC (i.e., the prompt and accurate clearance and
settlement of securities transactions, the safeguarding of securities
and funds, and the protection of investors and the public interest as
discussed in section III.A.1.iii above), the Proposed Rule Change is
consistent with the requirements of Section 17A(b)(3)(I) of the Act.

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

    Rule 17Ad-22(e)(4)(i) under the Act requires that a covered
clearing agency 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.\98\
---------------------------------------------------------------------------

    \98\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Increasing membership capital requirements, as described above in
Section II.A., would help ensure that

members maintain sufficient capital to meet their obligations to NSCC,
including potential future obligations required to fund its trading
activity with NSCC or to absorb losses allocated to it. By ensuring
members' ability to meet their financial obligations to NSCC, the
proposal, in turn, will help ensure NSCC continues to maintain
sufficient financial resources to cover its credit exposure to each
participant fully with a high degree of confidence.\99\
---------------------------------------------------------------------------

    \99\ Four commenters argue that, rather than manage its credit
exposure, NSCC should reduce the risk by shortening the settlement
cycle. See Alpine Letter, supra note 8, at 8-9; STANY Letter, supra
note 8, at 5; Wilson Letter, supra note 8, at 4-6; Zakhary Letter,
supra note 8, at 2. However, NSCC manages credit risk under the
current standard settlement cycle, and the Commission disagrees that
it would be feasible for NSCC to unilaterally change the industry
standard settlement cycle.
---------------------------------------------------------------------------

    Certain commenters argue that NSCC fails to establish evidence that
there exists an actual credit exposure to NSCC that the proposed
increased Excess Net Capital requirements would cover that is not
already covered by NSCC's margin requirements.\100\ NSCC responds to
these commenters by stating that as a matter of law and regulation,
NSCC is required to manage many different risks, including legal,
credit, liquidity, operational, general business, investment, and
custody, regardless of whether any of the risks materialize into an
actual issue.\101\ While members may not routinely experience issues
related to legal, operational, or cyber risks, these issues can arise,
possibly without advance warning, and, as such, they are considered a
critical part of the ongoing credit risks that members present to NSCC
and that NSCC must manage.\102\
---------------------------------------------------------------------------

    \100\ See Wilson Letter, supra note 8, at 3; Monson Letter,
supra note 8, at 3.
    \101\ NSCC Response Letter, supra note 19, at 2.
    \102\ See id.
---------------------------------------------------------------------------

    In considering these comments, the Commission thoroughly reviewed
and considered the Proposed Rule Change, including the supporting
exhibits that provided confidential analysis on the impact and
rationale for the proposed capital requirements. Based on its review of
these materials, the Commission believes that the proposal would, in
fact, better enable NSCC to cover its credit exposure to Members and
meet the applicable Commission regulatory requirements. Specifically,
the Commission has considered the relationship between members' VaR and
their excess net capital, which indicates that on average broker-
dealers with lower Excess Net Capital amounts present higher risk
exposures to NSCC relative to their capital levels, and that, upon
application of the proposed requirements, the risk to NSCC decreases
and is more consistent across NSCC's members, as evidenced by the more
consistent VaR/ENC levels across NSCC's members under the proposed
minimum requirements, while balancing the increased exposure and the
impact on members.\103\ Therefore, the Commission believes that the
proposal would provide NSCC with stronger risk management with respect
to the higher risk exposure and establish risk-based criteria for
participation.
---------------------------------------------------------------------------

    \103\ See supra notes 19-21. See also supra text accompanying
notes 71-73.
---------------------------------------------------------------------------

    Additionally, the proposal to revise the Watch List, as described
above in Section II.B, could help NSCC better allocate its resources
for monitoring its credit exposures to members, which, in turn, could
help NSCC more effectively manage and mitigate its credit exposures to
its members. Therefore, the Commission believes the Proposed Rule
Change is consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.

D. Consistency With Rule 17Ad-22(e)(18)

    Rule 17Ad-22(e)(18) under the Act requires that a covered clearing
agency establish, implement, maintain, and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation, which permit fair and
open access by direct and, where relevant, indirect participants and
other financial market utilities, require participants to have
sufficient financial resources and robust operational capacity to meet
obligations arising from participation in the clearing agency, and
monitor compliance with such participation requirements on an ongoing
basis.\104\
---------------------------------------------------------------------------

    \104\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    As described above in Section II.A., the proposal will increase
NSCC's minimum capital requirements for its members. As it relates to
U.S. broker-dealer members, the amount of the proposed increase to
Excess Net Capital requirements will be based on a tiered approach
designed to reflect the level of risk the member presents to NSCC. For
non-U.S. broker-dealer members, the proposal will impose a flat equity
capital requirement.
    Similarly, the proposal will establish membership categories for
national securities exchanges and Index Receipt Agents, for purposes of
NSCC's minimum capital requirements, and will impose capital
requirements based on the analysis of the risk profiles of these
entities and their importance to the functioning of the securities
markets. By establishing these new categories, NSCC will replace
conditional and discretionary minimum capital requirements with
objective minimum capital requirements commensurate with the risks
these members pose to NSCC.
    For both U.S. and non-U.S. bank and trust company members and
limited members, the proposal will revise how net capital is defined to
incorporate a measurement used by banking regulators, and impose
additional financial requirements on non-U.S. bank and trust company
members tied to home country regulatory requirements and international
standards. The proposal will also establish a category for all other
members, which will impose minimum financial requirements tied to that
entity's regulatory requirements, which NSCC may increase based on how
closely it resembles another membership type and its risk-profile.
    First, the proposal to increase minimum capital requirements to
NSCC's members will help to ensure each member has and maintains
sufficient financial resources to meet obligations arising from its
participation in NSCC. Second, the proposal will further establish
objective, risk-based, and publicly disclosed criteria for setting the
amounts of NSCC's increased capital requirements for its members. The
proposed changes will apply to all NSCC members as set forth in NSCC's
public-facing Rules.\105\ For U.S. broker-dealer members, the tiered
approach sets capital requirements to the level of risk the member
presents to NSCC and is therefore designed to establish objective and
risk-based criteria for U.S. broker-dealers to participate in NSCC.
---------------------------------------------------------------------------

    \105\ The Commission also understands that NSCC considered
several additional factors, including inflation, historical
development of the proposal, and the capital requirements of other
financial market infrastructures. See Notice of Filing, supra note
3, at 74186; and supra note 12. The Commission believes that these
factors demonstrate the reasonableness of the proposed minimum
capital requirements, as discussed above in Section III.A.i.
---------------------------------------------------------------------------

    Certain commenters argue, in various ways, that the proposal's
rationale for the increased capital requirements are vague, arbitrary,
and specious.\106\ The

Commission disagrees. As discussed above, on average broker-dealer
members with lower Excess Net Capital amounts present higher risk
exposures to NSCC relative to their capital levels.\107\ Additionally,
the Commission understands that NSCC considered several additional
risks faced by its members, both qualitative and quantitative, in
determining its proposed capital requirements, which the Commission
believes demonstrate the reasonableness of the proposed minimum capital
requirements, as discussed above in Section III.A.i.\108\ Regarding
U.S. and non-U.S. banks and trust companies, the proposal will set the
minimum capital requirements based on standards and measures used by
banking regulators. Regarding non-U.S. broker-dealers and for all other
types of members, the proposal would eliminate conditional and
discretionary minimum capital requirements in favor of establishing
objective minimum capital requirements. Therefore, the Commission
concludes the proposal is reasonably designed to establish objective,
risk-based, and publicly disclosed criteria for participation.
---------------------------------------------------------------------------

    \106\ See Alpine Letter, supra note 8, at 1-2 and 5-6; Wilson
Letter, supra note 8, at 8-9; Zakhary Letter, supra note 8, at 1.
Certain commenters argue members that self-clear present more risk
to NSCC than members who clear on behalf of others. See STANY
Letter, supra note 8, at 3; Letter from Charles F Lek, Chief
Executive Officer, Lek Securities Corporation (January 19, 2022)
(``Lek Letter''), supra note 8, at 1-2; Comment from Wendie Wachtel,
Chief Operating Officer, Wachtel and Co., Inc. (March 22, 2022)
(``Wachtel Letter''), supra note 8, at 2. However, the argument is
not relevant to the proposal because it is based on an inaccurate
assertion that self-clearing includes proprietary trading firms
only, while clears on behalf of others refers to agency firms only.
Rather, both types of members could be engaged in both proprietary
and customer trading.
    \107\ See supra note 54 and accompanying text.
    \108\ See supra note 72. See also Notice of Filing, supra note
3, at 74196; and NSCC Response Letter, supra note 19, at 2 (noting
that while members may not routinely experience issues related to
legal, operational, or cyber risks, these issues can arise, possibly
without advance warning, and, as such, they are considered a
critical part of the ongoing credit risks that members present to
NSCC and that NSCC must manage).
---------------------------------------------------------------------------

    For the reasons described above, the Commission finds that the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(18) under the
Act.\109\
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    \109\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \110\ and
the rules and regulations promulgated thereunder.
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    \110\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\111\ that proposed rule change SR-NSCC-2021-016, be, and hereby is,
approved.\112\
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    \111\ 15 U.S.C. 78s(b)(2).
    \112\ In approving the Proposed Rule Change, the Commission
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\113\
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    \113\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-18861 Filed 8-31-22; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 83, Number 156 (Monday, August 13, 2018)]
[Notices]
[Page 40030]
[FR Doc No: 2018-17290]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Project No. 1510-018]

City of Kaukauna, Wisconsin; Notice of Availability of
Environmental Assessment

    In accordance with the National Environmental Policy Act of 1969
and the Federal Energy Regulatory Commission's (Commission)
regulations, 18 CFR part 380, the Office of Energy Projects has
reviewed the application for a new license for the Kaukauna Hydro
Project, located on the Lower Fox River, in the City of Kaukauna,
Outagamie County, Wisconsin, and has prepared an Environmental
Assessment (EA) for the project.
    The EA contains staff's analysis of the potential environmental
impacts of the project and concludes that licensing the project, with
appropriate environmental protective measures, would not constitute a
major federal action that would significantly affect the quality of the
human environment.
    A copy of the EA is available for review at the Commission in the
Public Reference Room or may be viewed on the Commission's website at
http://www.ferc.gov using the ``eLibrary'' link. Enter the docket
number excluding the last three digits in the docket number field to
access the document. For assistance, contact FERC Online Support at
[email protected],<PHONE_NUMBER> (toll free), or (202) 502-
8659 (TTY).
    You may also register online at http://www.ferc.gov/docs-filing/esubscription.asp to be notified via email of new filings and issuances
related to this or other pending projects. For assistance, contact FERC
Online Support.
    Any comments should be filed within 30 days from the date of this
notice.
    The Commission strongly encourages electronic filing. Please file
comments using the Commission's eFiling system at http://www.ferc.gov/docs-filing/efiling.asp. Commenters can submit brief comments up to
6,000 characters, without prior registration, using the eComment system
at http://www.ferc.gov/docs-filing/ecomment.asp. You must include your
name and contact information at the end of your comments. For
assistance, please contact FERC Online Support. In lieu of electronic
filing, please send a paper copy to: Secretary, Federal Energy
Regulatory Commission, 888 First Street NE, Washington, DC 20426. The
first page of any filing should include docket number P-1510-018.
    For further information, contact Erin Kimsey at<PHONE_NUMBER> or
by email at [email protected].

    Dated: August 7, 2018.
Kimberly D. Bose,
Secretary.
[FR Doc. 2018-17290 Filed 8-10-18; 8:45 am]
 BILLING CODE 6717-01-P