[Federal Register Volume 87, Number 202 (Thursday, October 20, 2022)]
[Notices]
[Pages 63845-63847]
[FR Doc No: 2022-22732]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96088; File No. SR-NSCC-2022-009]

Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change To Adopt Intraday
Volatility Charge and Eliminate Intraday Backtesting Charge

October 14, 2022.

I. Introduction

    On July 7, 2022, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2022-009 (the ``Proposed
Rule Change'') pursuant to FR 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 July 20,
2022,\3\ and the Commission has received comments regarding the changes
proposed in the Proposed Rule Change.\4\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 95286 (July 14, 2022),
87 FR 43355 (July 20, 2022) (File No. SR-NSCC-2022-009)
(``Notice'').
    \4\ Comments are available at https://www.sec.gov/comments/sr-nscc-2022-009/srnscc2022009.htm.
---------------------------------------------------------------------------

    On September 1, 2022, pursuant to FR 19(b)(2) of the Act,\5\ 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.\6\ This order institutes
proceedings, pursuant to FR 19(b)(2)(B) of the Act,\7\ to determine
whether to approve or disapprove the Proposed Rule Change.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 95650 (Sept. 1, 2022),
87 FR 55054 (Sept. 8, 2022) (SR-NSCC-2022-009).
    \7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

II. Summary of the Proposed Rule Change

    A key tool that NSCC uses to manage its respective credit exposures
to its members is the daily collection of margin from each member,
which is referred to as each member's Required Fund Deposit.\8\ The
aggregated amount of all members' margin constitutes the Clearing Fund,
which NSCC would access should a member default and the defaulted
member's own margin be insufficient to satisfy losses to NSCC caused by
the liquidation of that member's portfolio.
---------------------------------------------------------------------------

    \8\ The description of the Proposed Rule Change is based on the
statements prepared by NSCC in the Notice. See Notice, supra note 3.
Capitalized terms used herein and not otherwise defined herein are
defined in the Rules, available at https://www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
---------------------------------------------------------------------------

A. Intraday Volatility Charge

    The volatility component of each member's Required Fund Deposit is
designed to measure market price volatility of the start of day
portfolio and is calculated for members' Net Unsettled Positions. The
volatility component is designed to capture the market price risk \9\
associated with each member's portfolio at a 99th percentile level of
confidence. NSCC has two methodologies for calculating the volatility
component--a ``VaR Charge'' and a haircut-based calculation. The VaR
Charge applies to the majority of Net Unsettled Positions and is
calculated as the greater of (1) the larger of two separate
calculations that utilize a parametric Value at Risk (``VaR'') model,
(2) a gap risk measure calculation based on the concentration threshold
of the largest non-index

position in a portfolio, and (3) a portfolio margin floor calculation
based on the market values of the long and short positions in the
portfolio.\10\ The VaR Charge usually comprises the largest portion of
a Member's Required Fund Deposit.
---------------------------------------------------------------------------

    \9\ Market price risk refers to the risk that volatility in the
market causes the price of a security to change between the
execution of a trade and settlement of that trade. This risk is also
referred to herein as market risk and volatility risk.
    \10\ Procedure XV, FRs I(A)(1)(a)(i) and (2)(a)(i) of the Rules,
supra note 8.
---------------------------------------------------------------------------

    In the Proposed Rule Change, NSCC is proposing to implement an
intraday volatility charge, which it may collect on an intraday basis,
to better address the volatility risks presented by Members' adjusted
intraday Net Unsettled Positions between start of day collections of
Required Fund Deposits. More specifically, NSCC is proposing to utilize
its existing intraday monitoring to determine when the difference
between a Member's (1) start of day volatility charge, collected on
that Business Day as part of the Member's start of day Required Fund
Deposit based on that Member's prior end-of-day Net Unsettled
Positions, and (2) a calculation of the volatility charge based on that
Member's adjusted intraday Net Unsettled Positions as of a point
intraday between the collection of the start of day Required Fund
Deposit and end of day settlement, exceeds 100 percent and the amount
that would be collected as an intraday volatility charge, calculated as
described below, would be greater than $250,000. The amount of the
intraday volatility charge would be reduced by the amount collected
from that Member at the start of that Business Day as the volatility
portion of the Margin Requirement Differential charge, as discussed in
more detail in the Notice.
    NSCC is also proposing that it would not collect an intraday
volatility charge when the quantitative thresholds are met, if (a)
trades submitted later in the day would offset trades submitted earlier
in the day, such that the quantitative thresholds would not have been
met if such activity had been submitted earlier in the day, or (b) the
threshold was met due to the submission of an erroneous trade that can
be corrected. NSCC would continue to monitor intraday volatility in 15-
minute increments throughout the day, and the calculation of the
intraday volatility charge would be done at those intervals. While
collections may occur multiple times throughout the day, intraday
volatility charges are more likely to be collected later in the day,
after additional, and potentially offsetting, activity has been
submitted.
    The proposed methodology would allow NSCC to measure the change in
the volatility charge to determine if such change presents NSCC with
exposures that are not adequately addressed by the start of day
volatility charge on deposit in the Clearing Fund. By collecting an
amount that is measured as the difference between the two volatility
charge calculations, NSCC would be able to supplement the volatility
charge already on deposit in its Clearing Fund with an amount that
measures the change in volatility that has occurred since the Required
Fund Deposit was collected at the start of the day.

B. Intraday Backtesting Charge

    The Backtesting Charge is an additional component of a member's
Required Fund Deposit that NSCC may assess at either the start of the
day as the Regular Backtesting Charge, or on an intraday basis as the
Intraday Backtesting Charge. More specifically, NSCC may assess a
Backtesting Charge against any member that has a 12-month trailing
backtesting coverage below the 99 percent backtesting coverage target.
When calculating a member's backtesting coverage, NSCC excludes amounts
already collected as a Backtesting Charge in calculating any applicable
Backtesting Charge.\11\
---------------------------------------------------------------------------

    \11\ Procedure XV, FRs I(B)(3) of the Rules, supra note 8.
---------------------------------------------------------------------------

    If assessed, a member's Backtesting Charge is generally equal to
the member's third largest deficiency, when calculating the Regular
Backtesting Charge, and fifth largest deficiency, when calculating the
Intraday Backtesting Charge, that occurred during the previous 12
months. NSCC may adjust the Backtesting Charge if it determines that
circumstances particular to a member's settlement activity and/or
market price volatility warrant a different approach to determining or
applying such charge in a manner consistent with achieving NSCC's
backtesting coverage target.
    In the Proposed Rule Change, NSCC is proposing to eliminate the
Intraday Backtesting Charge for several reasons, as set forth in more
detail in the Notice. First, in connection with recent regulatory
feedback, NSCC has determined that the current methodology for
calculating the Intraday Backtesting Charge makes an unreasonable
assumption that NSCC would cease to act for a member that has paid all
of its intraday margin requirements. As a result, this calculation
methodology may underestimate a member's backtesting losses and
undercount potential backtesting deficiencies. Second, NSCC believes it
will continue to be able to adequately address both its intraday market
risk exposures and its backtesting coverage metrics if it eliminates
the Intraday Backtesting Charge. Additionally, NSCC would maintain the
Regular Backtesting Charge, which is collected at the start of the day,
to support its backtesting coverage. Studies reviewing the impact of
removing the Intraday Backtesting Charge on NSCC's backtesting coverage
metrics indicate that this proposal would not have a significant impact
on NSCC's ability to maintain its backtesting coverage target.

III. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to FR
19(b)(2)(B) of the Act \12\ to determine whether the Proposed Rule
Change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the Proposed Rule Change. Institution of proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the Proposed Rule Change,
providing the Commission with arguments to support the Commission's
analysis as to whether to approve or disapprove the Proposed Rule
Change.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to FR 19(b)(2)(B) of the Act,\13\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of, and input from commenters with respect to, the Proposed
Rule Change's consistency with FR 17A of the Act,\14\ and the rules
thereunder, including the following provisions:
---------------------------------------------------------------------------

    \13\ Id.
    \14\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

     Section 17A(b)(3)(F) of the Act,\15\ which requires, among
other things, that the rules of a clearing agency must be designed to
promote the prompt and accurate clearance and settlement of securities
transactions, to 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 to protect investors and the public interest; and
---------------------------------------------------------------------------

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

     Rule 17Ad-22(e)(4)(i) of the Act,\16\ which 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.
---------------------------------------------------------------------------

    \16\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

     Rule 17Ad-22(e)(6)(i) of the Act,\17\ which requires that
a covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to cover, if the
covered clearing agency provides central counterparty services, its
credit exposures to its participants by establishing a risk-based
margin system that, at a minimum, considers, and produces margin levels
commensurate with, the risks and particular attributes of each relevant
product, portfolio, and market.
---------------------------------------------------------------------------

    \17\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

     Rule 17Ad-22(e)(23)(ii) of the Act \18\ which requires
that a covered clearing agency establish, implement, maintain, and
enforce written policies and procedures reasonably designed to provide
sufficient information to enable participants to identify and evaluate
the risks, fees, and other material costs they incur by participating
in the covered clearing agency.
---------------------------------------------------------------------------

    \18\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the Proposed Rule Change. In particular, the Commission invites
the written views of interested persons concerning whether the Proposed
Rule Change is consistent with FR 17A(b)(3)(F) of the Act,\19\ and
Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii) of the Act,\20\ or
any other provision of the Act, or the rules and regulations
thereunder.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78q-1(b)(3)(F).
    \20\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and
arguments regarding whether the Proposed Rule Change should be approved
or disapproved by November 10, 2022. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
November 25, 2022.
    The Commission asks that commenters address the sufficiency of
NSCC's statements in support of the Proposed Rule Change, which are set
forth in the Notice,\21\ in addition to any other comments they may
wish to submit about the Proposed Rule Change.
---------------------------------------------------------------------------

    \21\ See Notice, supra note 3.
---------------------------------------------------------------------------

    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
File Number SR-NSCC-2022-005 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2022-009. 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 website (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 website 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 website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2022-009 and should be submitted on
or before November 10, 2022. Rebuttal comments should be submitted by
November 25, 2022.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(31).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-22732 Filed 10-19-22; 8:45 am]
BILLING CODE 8011-01-P