[Federal Register Volume 88, Number 219 (Wednesday, November 15, 2023)]
[Notices]
[Pages 78425-78428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25104]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98881; File No. SR-NSCC-2023-009]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change Relating to the 
Schedule of Haircuts for Eligible Clearing Fund Securities

November 8, 2023.

I. Introduction

    On September 22, 2023, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2023-009 to modify the 
schedule of haircuts for Eligible Clearing Fund Securities, and to 
remove it and the related concentration limits from Procedure XV of the 
NSCC Rules (``Procedure XV''), and make other clarifying changes 
(``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 October 4, 2023.\3\ The Commission has received 
no comments on the Proposed Rule Change. For the reasons discussed 
below, the Commission is approving the Proposed Rule Change.\4\
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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. 98589 (Sept. 28, 
2023), 88 FR 68777 (Oct. 4, 2023) (File No. SR-NSCC-2023-009) 
(``Notice of Filing'').
    \4\ Capitalized terms not defined herein are defined in the NSCC 
Rulebook (``NSCC Rules''), available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
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II. Background

    NSCC is a central counterparty (``CCP''), which means it interposes 
itself as the buyer to every seller and seller to every buyer for the 
financial transactions it clears. As such, NSCC is exposed to the risk 
that one or more of its members may fail to make a payment or to 
deliver securities.
    A key tool that NSCC uses to manage its credit exposures to its 
members is the daily collection of margin (referred to as ``Required 
Fund Deposit'' in the NSCC Rules) from each member.\5\ The aggregated 
amount of all NSCC members' margin constitutes the Clearing Fund. The 
objective of the Clearing Fund is to mitigate potential losses to NSCC 
associated with liquidating a member's portfolio in the event NSCC 
ceases to act for that member (hereinafter referred to as a 
``default'').\6\ NSCC would be able to access the Clearing Fund should 
a defaulting member's own margin be insufficient to satisfy losses to 
NSCC caused by the liquidation of that member's portfolio.
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    \5\ See NSCC Rule 4, supra note 4 (requiring members to make 
Required Fund Deposits to the Clearing Fund with the amount of each 
member's deposit being determined by NSCC in accordance with these 
rules).
    \6\ The NSCC Rules identify when NSCC may cease to act for a 
member and the types of actions NSCC may take. For example, NSCC may 
suspend a firm's membership with NSCC or prohibit or limit a 
member's access to NSCC's services in the event that member defaults 
on a financial or other obligation to NSCC. See NSCC Rule 46 
(Restrictions on Access to Services), supra note 4.
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    A member may provide its required margin in the form of cash or an 
open account indebtedness secured by Eligible Clearing Fund 
Securities.\7\ Eligible Clearing Fund Securities are defined to include 
certain agency, mortgage-backed, and Treasury securities.\8\ These 
securities are valued based on the prior Business Day's closing market 
price, less a haircut, and may be subject to a concentration limit.\9\ 
NSCC states that haircuts are used to protect NSCC and its members from 
price fluctuations, i.e., if NSCC is required to liquidate collateral 
of an insolvent member and such collateral is worth less at the time of 
liquidation than when it is pledged to NSCC.\10\ NSCC also states that 
concentration limits are intended to reduce NSCC's risk by limiting the 
percentage of certain types of Eligible Clearing Fund Securities 
pledged by members to secure the Clearing Fund deposits, because when a 
member's portfolio contains large net unsettled positions in a 
particular group of securities with a similar risk profile or in a 
particular asset type, such securities could present additional risk to 
NSCC.\11\
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    \7\ See NSCC Rule 4, Section 1 (Required Fund Deposits), supra 
note 4.
    \8\ See NSCC Rule 1 (defining what constitutes Eligible Clearing 
Fund Securities and the components thereof, which are Eligible 
Clearing Fund Agency Securities, Eligible Clearing Fund Mortgage-
Backed Securities, and Eligible Clearing Fund Treasury Securities), 
supra note 4.
    \9\ See Section II.(A)1. of Procedure XV, supra note 4.
    \10\ Notice of Filing, supra note 3, 88 FR at 68777.
    \11\ Id.
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    Currently, collateral haircuts applicable to relevant security 
types and remaining maturity terms are specified as fixed percentages 
in Section III.(A) of Procedure XV (``Section III.(A)'').\12\ According 
to NSCC and set forth in its internal risk management procedures, the 
sufficiency of collateral haircuts is evaluated through use of back-
tests, stress-tests and market observations.\13\ Specifically, NSCC 
conducts daily backtesting analysis by comparing the collateral haircut 
for each member in simulated liquidations with the member's actual 
collateral held on deposit at NSCC.\14\ NSCC escalates any exceptions 
that it observes to assess the root cause and determine whether further 
analysis and/or review would be appropriate, taking into account 
whether a particular security may present inherent volatility and/or 
liquidity risks that could likely result in an erosion in the value of 
the security exceeding the applicable collateral haircut.\15\ On a 
quarterly basis, NSCC reviews the composition of the Eligible Clearing 
Fund Securities that members have pledged to secure their Required Fund 
Deposits in order to assess the sufficiency of the collateral haircuts 
applied and whether any haircut changes would be needed, taking into 
account backtesting results, any

[[Page 78426]]

instances where the simulated losses from available historical stress 
testing scenario dates have exceeded the collateral haircut values, and 
market conditions.\16\
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    \12\ See Section III.(A) of Procedure XV, supra note 4. Section 
III.(A) was last modified in 2011 in order to conform the haircuts 
to requirements of NSCC's lenders under its credit facilities. See 
Securities Exchange Act Release No. 64487 (May 13, 2011), 76 FR 
29019 (May 19, 2011) (SR-NSCC-2011-02).
    \13\ Notice of Filing, supra note 3, 88 FR at 68777. NSCC also 
filed excerpts from its internal market risk management procedures 
as Confidential Exhibit 3b to its filing.
    \14\ Id.
    \15\ Id.
    \16\ Id. at 68778.
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    In addition to collateral haircuts, NSCC applies concentration 
limits to certain Eligible Clearing Fund Securities set forth in the 
NSCC Rules. Under these limits, no more than 20 percent of a member's 
Required Fund Deposit may be in the form of Eligible Clearing Fund 
Agency Securities that are of a single issuer and no member may post as 
eligible collateral Eligible Clearing Fund Agency Securities of which 
it is the issuer.\17\ In addition, any deposits of Eligible Clearing 
Fund Agency Securities or Eligible Clearing Fund Mortgage-Backed 
Securities in excess of 25 percent of a member's Required Fund Deposit 
will be subject to a haircut that is twice the amount of the percentage 
noted in Section III.(A), and a member may deposit Eligible Clearing 
Fund Mortgage-Backed Securities of which it is the issuer, however such 
securities will be subject to a premium haircut, with the initial 
haircut being 14 percent, and if a member also exceeds the 25 percent 
concentration limit, the haircut shall be 21 percent.\18\
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    \17\ See Section II.(A)1. of Procedure XV, supra note 4.
    \18\ Id.
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    Changes to the collateral haircuts and concentration limits are 
subject to NSCC's internal governance process.\19\ According to NSCC 
and based on its internal risk management procedures, if NSCC 
determines that, based on the analyses that it performs, there is 
insufficient/excessive collateral haircut/concentration due to an 
identifiable cause that affected multiple members and such cause would 
likely persist based on NSCC's assessment of market conditions, such 
outcome or result could cause NSCC to amend the haircuts/concentration 
limits in the haircut schedule.\20\ If NSCC determines that a change to 
the haircut schedule is warranted, it would document the recommendation 
and rationale for the change at the time of such determination and 
obtain approval from an executive director or above with a notice to 
the risk management committee.\21\ Before making adjustments to the 
haircut schedule, NSCC measures the potential impact of such 
adjustments to ensure any impact is both necessary and appropriate.\22\
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    \19\ Notice of Filing, supra note 3, 88 FR at 68778; see also 
note 13 supra.
    \20\ Id.
    \21\ Id.
    \22\ Id.
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III. Description of the Proposed Rule Change

    In the Notice of Filing, NSCC states that it has observed that 
under volatile market conditions with elevated frequency and magnitude 
of securities price movements, the collateral value of Eligible 
Clearing Fund Securities may shift in a relatively short period of time 
and the current haircuts may not sufficiently account for the change in 
value.\23\ When the erosion in the value of the Eligible Clearing Fund 
Securities exceeds the relevant haircuts, NSCC is exposed to increased 
risk of potential losses associated with liquidating a member's 
portfolio in the event of a member default when the defaulting member's 
own margin is insufficient to satisfy losses to NSCC caused by the 
liquidation of that member's portfolio.\24\ Similarly, when a member's 
portfolio contains large net unsettled positions in a particular group 
of securities with a similar risk profile or in a particular asset 
type, such securities could present additional risk to NSCC.\25\ The 
additional risk exposures associated with liquidating a member's 
portfolio in the event of a member default could lead to an increase in 
the likelihood that NSCC would need to mutualize losses among non-
defaulting members during the liquidation process.\26\ However, any 
changes to the haircuts and/or concentration limits currently requires 
a proposed rule change to be filed with the Commission.
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    \23\ Id.
    \24\ Id.
    \25\ Id.
    \26\ Id.
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    Therefore, to provide NSCC with more flexibility in adjusting the 
haircuts and concentration limits so NSCC can respond to changing 
market conditions more promptly in order to mitigate the additional 
risk exposure, NSCC is proposing to remove Section III.(A) and 
concentration limits from the Rules, and to publish the haircuts and 
concentration limits in a haircut schedule on NSCC's website.\27\
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    \27\ Specifically, NSCC is proposing to delete subsections (a) 
and (b) of Section II.(A)1. of Procedure XV (Special Provisions 
Related to Eligible Clearing Fund Securities), and delete Section 
III of Procedure XV (Collateral Value of Eligible Clearing Fund 
Securities) to remove all haircuts and concentration limits from the 
Rules. NSCC is also proposing to (i) remove references to Section 
III of Procedure XV in two places in Rule 4, and replace them with a 
reference to Section II.(A) of Procedure XV; (ii) remove references 
to subsections 1(a) and (b) of Section II.(A) of Procedure XV and 
references to Section III of Procedure XV in Rule 56; and (iii) 
remove a reference to Section III of Procedure XV in Section II.(A) 
of Procedure XV, and replace it with a reference to the proposed 
haircut schedule, to reflect the proposed changes described above.
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    In addition, NSCC is proposing to add language in Section II.(A)1. 
that makes it clear that all Eligible Clearing Fund Securities pledged 
to secure Clearing Fund deposits shall, for collateral valuation 
purposes, be subject to a haircut and may be subject to a concentration 
limit. The proposed language would provide that NSCC shall determine 
the applicable haircuts and any concentration limits from time to time 
in accordance with its internal policy and governance process, based on 
factors determined to be relevant by NSCC, which may include, for 
example, backtesting results and NSCC's assessment of market 
conditions, in order to set appropriately conservative haircuts and/or 
concentration limits for the Eligible Clearing Fund Securities and 
minimize backtesting deficiency occurrences. The proposed language 
would also provide that the haircuts and any concentration limits 
prescribed by NSCC shall be set forth in a haircut schedule that is 
published on NSCC's website. The proposed language would also state 
that it shall be the member's responsibility to retrieve the haircut 
schedule, and that NSCC would provide members with at a minimum one 
Business Day's advance notice of any change in the haircut schedule.
    NSCC states that the proposed change to move the haircuts and 
concentration limits from the Rules to the website would enable NSCC to 
adjust the haircuts and concentration limits without undergoing a rule 
filing process (although it could still necessitate an advance notice 
under Title VIII of the Dodd-Frank Act, if a change materially affects 
the nature or level of risks presented by NSCC).\28\ NSCC states that 
by being able to make appropriate and timely adjustments to the 
haircuts and concentration limits, it would have the flexibility to 
respond to changing market conditions more promptly.\29\ Having the 
flexibility to respond to changing market conditions more promptly 
would in turn help better ensure that NSCC collects sufficient margin 
from members as well as risk manages its credit exposures to its 
members.\30\
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    \28\ Notice of Filing, supra note 3, 88 FR at 68779 and n. 11 
(citing 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i)).
    \29\ Id.
    \30\ Id.
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    In its Notice of Filing, NSCC also provides an overview regarding 
its changes to the categories relating to Treasury Inflation-Protected 
Securities (``TIPS'').\31\ NSCC states that, as part of

[[Page 78427]]

its daily backtesting regarding the adequacy of collateral haircuts, 
NSCC has determined that in periods where the inflation rate 
fluctuates, the current haircut levels for TIPS have been inadequate to 
address the fluctuations from time to time.\32\ This is because TIPS 
are indexed to the inflation rate, and prices on TIPS move inversely to 
their yields, e.g., when the inflation rate increases, prices on TIPS 
decrease. When the decline in market value of TIPS exceeds the haircut 
for TIPS, NSCC would be exposed to potential liquidation losses.\33\
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    \31\ TIPS are a type of Treasury security issued by the U.S. 
government that are indexed to inflation such that the principal 
value of the security rises as inflation rises.
    \32\ Notice of Filing, supra note 3, 88 FR at 68779.
    \33\ Id.
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    Accordingly, NSCC is planning to address haircuts for TIPS in a 
separate category, as opposed to as part of a category also including 
Treasury Bills, Notes, and Bonds, and to increase the haircut levels 
for TIPS to ensure that the haircut levels would be commensurate with 
the particular risk attributes of TIPS.\34\ NSCC describes the new TIPS 
haircut categories as follows:\35\
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    \34\ Id. NSCC also stated that its review of TIPS haircuts at 
other registered clearing agencies demonstrate that NSCC's current 
haircut levels for TIPS are generally lower than the TIPS haircuts 
required by other clearing agencies and foreign CCPs, particularly 
with respect to maturity ranges of 10 years or longer. Id. 
(summarizing and citing various other clearing agency rules).
    \35\ Id. NSCC also reflected the changes with respect to 
haircuts for TIPS on the haircut schedule filed as Exhibit 3c to the 
Notice of Filing, which would be posted to its website if the 
Proposed Rule Change were approved.

----------------------------------------------------------------------------------------------------------------
                                                        Maturity               Current (%)        Proposed (%)
----------------------------------------------------------------------------------------------------------------
TIPS.......................................  Zero to 1 year...............                2.0                2.0
                                             1 year to 2 years............                2.0                3.0
                                             2 years to 5 years...........                3.0                5.0
                                             5 years to 10 years..........                4.0                7.0
                                             10 years to 15 years.........                6.0                7.0
                                             15 years or greater..........                6.0               10.0
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    NSCC conducted an impact study for the period from September 1, 
2021 through August 31, 2022 (``Impact Study'').\36\ The results of the 
Impact Study indicate that, if the haircut changes for TIPS had been in 
place, it would have resulted in an average daily increase of $197,000 
in the Clearing Fund assuming TIPS were deposited.\37\
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    \36\ NSCC filed this Impact Study as confidential Exhibit 3a to 
the Notice of Filing.
    \37\ Notice of Filing, supra note 3, 88 FR at 68780 (also 
providing a more detailed summary of the Impact Study).
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    Finally, NSCC is proposing to clarify language in Sections 
I.(B)(1), II.(A), II.(B), II.(C) and II.(D) of Procedure XV to reflect 
that Mutual Fund/Insurance Services Members and other Limited Members 
are no longer required to make deposits into the Clearing Fund. In 
2022, NSCC removed the requirement that any Limited Members, including 
Mutual Fund/Insurance Services Members, make any deposits to the 
Clearing Fund.\38\ Sections I.(B)(1), II.(A), II.(B), II.(C) and II.(D) 
of Procedure XV still contain references to Mutual Fund/Insurance 
Service Members and/or Limited Members making deposits into the 
Clearing Fund, and NSCC states that it would remove those references 
for clarity.\39\
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    \38\ See Securities Exchange Act Release No. 93722 (Dec. 6, 
2021), 86 FR 70548 (Dec. 10, 2021) (SR-NSCC-2021-015).
    \39\ Notice of Filing, supra note 3, 88 FR at 68779.
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IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \40\ directs the Commission to 
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 carefully considering the Proposed Rule 
Change, 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 
section 17A(b)(3)(F) \41\ of the Act and Rules 17Ad-22(e)(5) and 
(e)(23), each promulgated under the Act.\42\
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    \40\ 15 U.S.C. 78s(b)(2)(C).
    \41\ 15 U.S.C. 78q-1(b)(3)(F).
    \42\ 17 CFR 240.17Ad-22(e)(5) and (e)(23).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \43\ requires that the rules of a 
clearing agency, such as NSCC, be designed to, among other things, 
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 the clearing agency or for which it is 
responsible.\44\ The Commission believes that the Proposed Rule Change 
is consistent with section 17A(b)(3)(F) of the Act for the reasons 
stated below.
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    \43\ 15 U.S.C. 78q-1(b)(3)(F).
    \44\ Id.
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    As stated in Part II supra, a key tool that NSCC uses to manage its 
credit exposures to its members is the daily collection of margin from 
each member described above, and NSCC applies haircuts to securities 
collected as margin to protect NSCC and its members from price 
fluctuations, i.e., if NSCC is required to liquidate collateral of an 
insolvent member and such collateral is worth less at the time of 
liquidation than when it is pledged to NSCC.
    By moving the location where collateral haircuts and concentration 
limits are published from NSCC's Rules to its website, the Proposed 
Rule change would add flexibility for NSCC to make timely adjustments 
to collateral haircuts and concentration limits during a time of 
potentially deteriorating market or other conditions, while preserving 
notice requirements to ensure that members are aware of risk management 
changes. This added flexibility should allow NSCC to continue to ensure 
that it can address changing market conditions rapidly and ensure that 
it is collecting sufficient margin to cover its credit exposures to 
members and minimizing exposures from members with large collateral 
positions in a particular group of securities with a similar risk 
profile or in a particular asset type.\45\
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    \45\ In addition, the Commission believes that the changes 
relating to the haircuts for TIPS would allow NSCC to ensure that 
the haircut levels would be commensurate with the particular risk 
attributes of TIPS, and thereby assure the safeguarding of 
securities and funds that are in its custody or control.
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    By helping NSCC to collect sufficient margin, the Proposed Rule 
Change would better ensure that, in the event of a member default, 
NSCC's operation of its critical clearance and settlement services 
would not be disrupted because of insufficient financial resources.

[[Page 78428]]

Accordingly, the Proposed Rule Change should help NSCC to continue 
providing prompt and accurate clearance and settlement of securities 
transactions, consistent with section 17A(b)(3)(F) of the Act.\46\
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    \46\ 15 U.S.C. 78q-1(b)(3)(F).
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    Moreover, because the Proposed Rule Change would continue to ensure 
that NSCC collects sufficient margin from members, it should also help 
minimize the likelihood that NSCC would have to access the Clearing 
Fund, thereby limiting non-defaulting members' exposure to mutualized 
losses. By helping to limit the exposure of NSCC's non-defaulting 
members to mutualized losses, the Proposed Rule Change should help NSCC 
assure the safeguarding of securities and funds which are in its 
custody or control, consistent with section 17A(b)(3)(F) of the 
Act.\47\
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    \47\ Id.
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    Finally, the proposed clarifying changes should help to ensure that 
NSCC's Rules are clear to members. When members better understand their 
rights and obligations regarding the Rules, members are more likely to 
act in accordance with the Rules, which should promote the prompt and 
accurate clearance and settlement of securities transactions. As such, 
the proposed clarifying changes are consistent with section 
17A(b)(3)(F) of the Act.\48\
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    \48\ Id.
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B. Consistency With Rule 17Ad-22(e)(5)

    Rule 17Ad-22(e)(5) under the Act \49\ requires, in part, a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to set and enforce 
appropriately conservative haircuts and concentration limits if the 
covered clearing agency requires collateral to manage its or its 
participants' credit exposure. As described in Part II supra, the 
proposed changes to move the collateral haircuts and concentration 
limits from NSCC's Rules should provide NSCC with more flexibility to 
respond to changing market conditions because adjustments to the 
haircuts and concentration limits would no longer require a rule 
change. By being able to make appropriate and timely adjustments to the 
haircuts and concentration limits, NSCC would have the flexibility to 
respond to changing market conditions more promptly. Specifically, NSCC 
would have the ability to promptly set and enforce conservative 
collateral haircuts and concentration limits that are reflective of the 
current market conditions. In this way, the proposed changes to move 
the collateral haircuts and concentration limits from the Rules to the 
website should help NSCC set and enforce appropriately conservative 
collateral haircuts and concentration limits, consistent with the 
requirements of Rule 17Ad-22(e)(5) under the Act.\50\
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    \49\ 17 CFR 240.17Ad-22(e)(5).
    \50\ Id.
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C. Consistency With Rule 17Ad-22(e)(23)

    Rule 17Ad-22(e)(23)(i) and (ii) \51\ under the Act requires each 
covered clearing agency to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to, among other 
things, publicly disclose all relevant rules and material procedures; 
and 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. Based on its review of 
the record, and for the reasons described below, the Commission finds 
that the proposed changes, taken together, are consistent with the 
requirements of Rule 17Ad-22(e)(23)(i) and (ii).\52\
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    \51\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
    \52\ Id.
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    By adopting rules that require NSCC to provide prior notice through 
public disclosures on its website relating to information on collateral 
haircuts and concentration limits, NSCC's Rules would support the 
communication of information that its members may use to identify and 
evaluate the haircuts and concentration limits resulting from NSCC's 
processes. As such, the Proposed Rule Change is consistent with 
publicly disclosing all relevant rules and material procedures; and 
providing sufficient information to enable participants to identify and 
evaluate the risks, fees, and other material costs incurred with 
participation in the covered clearing agency. The Commission finds, 
therefore, that the Proposed Rule Change is consistent with the 
requirements of Rule 17Ad-22(e)(23)(i) and (ii) under the Act.\53\
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    \53\ 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 \54\ and 
the rules and regulations promulgated thereunder.
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    \54\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\55\ that proposed rule change SR-NSCC-2023-009, be, and hereby is, 
approved.\56\
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    \55\ 15 U.S.C. 78s(b)(2).
    \56\ 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.\57\
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    \57\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-25104 Filed 11-14-23; 8:45 am]
BILLING CODE 8011-01-P