2828 Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3On December 28, 2017, NSCC filed this 

proposed rule change as an advance notice (SR– 

NSCC–2017–808) with the Commission pursuant to 

Section 806(e)(1) of Title VIII of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act 

entitled the Payment, Clearing, and Settlement 

Supervision Act of 2010 (‘‘Clearing Supervision 

Act’’), 12 U.S.C. 5465(e)(1), and Rule 19b–4(n)(1)(i) 

of the Act, 17 CFR 240.19b–4(n)(1)(i). A copy of the 

advance notice is available at http://www.dtcc.com/ 

legal/sec-rule-filings. 

4Capitalized terms not defined herein are defined 

in the Rules, available at http://dtcc.com/∼/media/ 

Files/Downloads/legal/rules/nscc_rules.pdf. 

5As described in greater detail in the filing, an 

EWMA volatility estimation is an estimation of 

volatility that gives more weight to most recent 

market observations, where an evenly-weighted 

volatility estimation is an estimation of volatility 

that gives even weight to historic market 

observations. 

6See id. 

7NSCC may calculate Members’ VaR Charge on 

an intraday basis for purposes of monitoring the 

risks presented by Members’ activity. These 

calculations would be also be performed using the 

proposed enhanced methodology. 

8 ‘‘Net Unsettled Positions’’ and ‘‘Net Balance 

Order Unsettled Positions’’ refer to net positions 

that have not yet passed their settlement date, or 

did not settle on their settlement date. See 

Procedure XV (Clearing Fund Formula and Other 

Matters) of the Rules, supra note 4. 

9See Rule 4 (Clearing Fund) and Procedure XV 

(Clearing Fund Formula and Other Matters), supra 

note 4. NSCC’s market risk management strategy is 

designed to comply with Rule 17Ad–22(e)(4) under 

the Act, where these risks are referred to as ‘‘credit 

risks.’’ 17 CFR 240.17Ad–22(e)(4). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–82494; File No. SR–NSCC– 

2017–020] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing of a 

Proposed Rule Change To Enhance 

the Calculation of the Volatility 

Component of the Clearing Fund 

Formula That Utilizes a Parametric 

Value-at-Risk Model and Eliminate the 

Market Maker Domination Charge 

January 12, 2018. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934, as 

amended (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on December 28, 2017, National 

Securities Clearing Corporation 

(‘‘NSCC’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the proposed rule change as described 

in Items I, II and III below, which Items 

have been prepared by the clearing 

agency.3 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

The proposed rule change of NSCC 

consists of modifications to NSCC’s 

Rules & Procedures (‘‘Rules’’) 4 in order 

to enhance the calculation of the 

volatility component of the Clearing 

Fund formula that utilizes a parametric 

Value-at-Risk (‘‘VaR’’) model (‘‘VaR 

Charge’’) by (1) adding an additional 

calculation utilizing the VaR model that 

incorporates an evenly-weighted 

volatility estimation, which would 

supplement the current calculation that 

utilizes the VaR model but incorporates 

an exponentially-weighted moving 

average (‘‘EWMA’’) volatility 

estimation,5 where the higher of the two 

calculations would be the core 

parametric result (‘‘Core Parametric 

Estimation’’); and (2) introducing two 

additional formulas to the calculation of 

the VaR Charge—the Gap Risk Measure 

and the Portfolio Margin Floor, where 

the results of these two calculations 

would be compared to the Core 

Parametric Estimation and the highest of 

the three would be a Member’s final 

VaR Charge, as described in greater 

detail below. 

NSCC is also proposing to eliminate 

the existing Market Maker Domination 

component (‘‘MMD Charge’’) from the 

Clearing Fund formula, as described in 

greater detail below. 

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

In its filing with the Commission, the 

clearing agency included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

clearing agency has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

(A) Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

1. Purpose 

NSCC is proposing to enhance the 

calculation of the VaR Charge by 

introducing an additional estimation of 

volatility that would be incorporated 

into the VaR model, and introducing 

two additional calculations, the Gap 

Risk Measure and the Portfolio Margin 

Floor, that NSCC believes would 

collectively enhance its ability to 

mitigate market price risk. NSCC 

currently calculates the VaR Charge by 

applying a parametric VaR model that 

incorporates an EWMA volatility 

estimation. NSCC is proposing to 

introduce an additional calculation that 

also applies the parametric VaR model 

but replaces the EWMA volatility 

estimation with an evenly-weighted 

volatility estimation.6 The result of 

these two calculations using the 

parametric VaR model would be 

compared and the higher of the two 

would be the Core Parametric 

Estimation. 

NSCC is also proposing to introduce 

two additional calculations to arrive at 

a final VaR Charge, the Gap Risk 

Measure and the Portfolio Margin Floor. 

NSCC would use the highest result 

between the Core Parametric Estimation, 

the Gap Risk Measure, when applicable, 

and the Portfolio Margin Floor 

calculations as a Member’s final VaR 

Charge.7

Each of the separate calculations 

would provide NSCC with a measure of 

the market price risk presented by the 

Net Unsettled Positions and Net Balance 

Order Unsettled Positions (for purposes 

of this filing, referred to collectively 

herein as ‘‘Net Unsettled Positions’’) 8 in 

a Member’s portfolio. Collectively, the 

proposed enhancements to the 

calculation of the VaR Charge would 

permit NSCC to more effectively cover 

its credit exposures and produce margin 

levels commensurate with the risks and 

particular attributes of each Member’s 

portfolio, as described in greater detail 

below. 

NSCC is also proposing to eliminate 

the existing MMD Charge from the 

Clearing Fund formula. When the MMD 

Charge was first introduced, it was 

developed to only address concentration 

risks presented by Net Unsettled 

Positions in certain securities that are 

traded by firms that are designated 

Market Makers, as described in greater 

detail below. Given this limited scope of 

application of this charge, and because 

NSCC believes it more effectively 

addresses the risks this charge was 

designed to address through other risk 

management measures, including the 

proposed Gap Risk Measure calculation 

of the VaR Charge, NSCC is proposing 

to eliminate the MMD Charge. 

Each of these proposed changes is 

described in more detail below. 

(i) Overview of the Required Deposit 

and NSCC’s Clearing Fund 

As part of its market risk management 

strategy, NSCC manages its credit 

exposure to Members by determining 

the appropriate Required Deposits to the 

Clearing Fund and monitoring its 

sufficiency, as provided for in the 

Rules.9 The Required Deposit serves as 


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10The Rules set out the circumstances under 

which NSCC may cease to act for a Member and the 

types of actions it may take. For example, NSCC 

may suspend a firm’s membership with NSCC or 

prohibit or limit a Member’s access to NSCC’s 

services in the event that Member defaults on a 

financial or other obligation to NSCC. See Rule 46 

(Restrictions on Access to Services) of the Rules, 

supra note 4. 

11Supra note 4. 

12As described in Procedure XV, Section 

I(A)(1)(a)(ii) and (iii) and Section I(A)(2)(a)(ii) and 

(iii) of the Rules, Net Unsettled Positions in certain 

securities are excluded from the VaR Charge and 

instead charged a volatility component that is 

calculated by multiplying the absolute value of 

those Net Unsettled Positions by a percentage. 

Supra note 4. 

13Procedure XV, Section I(A)(1)(a)(i) and Section 

I(A)(2)(a)(i) of the Rules, supra note 4. 

14As used herein, ‘‘Market Maker’’ means a 

member firm of the Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) that is registered by 

FINRA as a Market Maker pursuant to FINRA’s 

rules, available at http://finra.complinet.com/en/ 

display/display.html. 

15See Rule 11 (CNS System) and Procedure VII 

(CNS Accounting Operation), supra note 4. 

16For backtesting comparisons, NSCC uses the 

Required Deposit amount without regard to the 

actual collateral posted by the Member. 

17See 17 CFR 240.17Ad–22(e)(6)(i), (vi). 

each Member’s margin. The objective of 

a Member’s Required Deposit is to 

mitigate potential losses to NSCC 

associated with liquidation of such 

Member’s portfolio in the event that 

NSCC ceases to act for such Member 

(hereinafter referred to as a ‘‘default’’).10

The aggregate of all Members’ Required 

Deposits constitutes the Clearing Fund 

of NSCC, which it would access should 

a defaulting Member’s own Required 

Deposit be insufficient to satisfy losses 

to NSCC caused by the liquidation of 

that Member’s portfolio. 

Pursuant to NSCC’s Rules, each 

Member’s Required Deposit amount 

consists of a number of applicable 

components, each of which is calculated 

to address specific risks faced by NSCC, 

as identified within Procedure XV of the 

Rules.11 The volatility component of 

each Member’s Required Deposit is 

designed to measure market price 

volatility and is calculated for Members’ 

Net Unsettled Positions. The volatility 

component is designed to capture the 

market price risk associated with each 

Member’s portfolio at a 99th percentile 

level of confidence. The VaR Charge is 

the volatility component applicable to 

most Net Unsettled Positions,12 and 

usually comprises the largest portion of 

a Member’s Required Deposit. 

Procedure XV of the Rules currently 

provides that the VaR Charge shall be 

calculated in accordance with a 

generally accepted portfolio volatility 

margin model utilizing assumptions 

based on reasonable historical data and 

an appropriate volatility range.13 As 

such, NSCC currently calculates a 

Member’s VaR Charge utilizing the VaR 

model, which incorporates an EWMA 

volatility estimation. 

Currently, Members’ Required 

Deposits may also include an MMD 

Charge, applicable only to Members that 

are Market Makers and Members that 

clear for Market Makers.14 As described 

in greater detail below, the MMD Charge 

is imposed when these Members hold a 

Net Unsettled Position that is greater 

than 40 percent of the overall unsettled 

long position (sum of each clearing 

broker’s net long position) in that 

security in the Continuous Net 

Settlement (‘‘CNS’’) system.15

NSCC employs daily backtesting to 

determine the adequacy of each 

Member’s Required Deposit. NSCC 

compares the Required Deposit 16 for 

each Member with the simulated 

liquidation gains/losses using the actual 

positions in the Member’s portfolio, and 

the historical security returns. NSCC 

investigates the cause(s) of any 

backtesting deficiencies. As part of this 

investigation, NSCC pays particular 

attention to Members with backtesting 

deficiencies that bring the results for 

that Member below the 99 percent 

confidence target (i.e., greater than two 

backtesting deficiency days in a rolling 

twelve-month period) to determine if 

there is an identifiable cause of repeated 

backtesting deficiencies. 

Further, as a part of its model 

performance review, and consistent 

with its regulatory requirements, NSCC 

regularly assesses its risks as they relate 

to its model assumptions, parameters, 

and sensitivities, including those of its 

parametric VaR model, to evaluate 

whether margin levels are 

commensurate with the particular risk 

attributes of each relevant product, 

portfolio, and market.17 As part of 

NSCC’s model performance monitoring, 

NSCC management analyzes and 

evaluates the continued effectiveness of 

its parametric VaR model in order to 

identify any weaknesses, and determine 

whether, and which, enhancements may 

be necessary to its formulas, parameters 

or assumptions to improve margin 

coverage. 

The proposed changes to the 

calculation of the VaR Charge, described 

below, are a result of NSCC’s regular 

review of the effectiveness of its 

margining methodology. 

(ii) Enhancements to the VaR Charge 

Adding an Evenly-Weighted Volatility 

Estimation to the VaR Model. To 

calculate the VaR Charge, NSCC uses a 

parametric VaR model that currently 

only incorporates an EWMA volatility 

estimation. The EWMA volatility 

estimation is considered front-weighted 

as it assigns more weight to most recent 

market observations based on the 

assumption that the most recent price 

history would have more relevance to, 

and therefore is a better measure of, 

current market price volatility levels. A 

calculation using this EWMA volatility 

estimation is responsive to changing 

market volatility, and, because NSCC’s 

Member-level model backtesting results 

have generally remained above a 99th 

percentile level of confidence over a 10- 

year performance window, NSCC 

believes this calculation continues to be 

an effective measurement of price 

volatility for the majority of Net 

Unsettled Positions that are subject to 

the VaR Charge. More specifically, 

NSCC believes its backtesting results 

show that this calculation has been 

proven to be effective for calculating the 

price volatility of large diversified 

portfolios, which represent the majority 

of Net Unsettled Positions that are 

subject to the VaR Charge. 

However, NSCC believes this 

calculation may not adequately cover a 

rapid change in market price volatility 

levels, including, for example, a drop in 

portfolio volatility in a stabilizing 

market. Additionally, NSCC has 

observed poorer backtesting coverage for 

those Members with less diversified 

portfolios in atypical market conditions. 

In estimating volatility, the EWMA 

volatility estimation gives greater weight 

to more recent market observations, and 

effectively diminishes the value of older 

market observations. However, volatility 

in equity markets often rapidly revert to 

pre-volatile levels, and then are 

followed by a subsequent spike in 

volatility. So, while a calculation that 

relies exclusively on the EWMA 

volatility estimation can capture 

changes in volatility that emerge from a 

progressively calm or non-volatile 

market, it may cause a reactive decrease 

in margin that does not adequately 

capture the risks related to a rapid shift 

in market price volatility levels. 

Alternatively, an evenly-weighted 

volatility estimation would continue to 

give even weight to all historical 

volatility observations in the look-back 

period (described below), and would 

prevent margin from decreasing too 

quickly. 

Therefore, in order to more 

adequately cover a rapid change in 

market price volatility levels and the 

risks presented by less diversified 

portfolios in its calculation of the VaR 

Charge, NSCC is proposing to add 

another calculation of the VaR Charge 

utilizing its parametric VaR model that 

would incorporate an evenly-weighted 

volatility estimation. NSCC believes an 


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18 Gap risk events may include, for example, 

earning reports, management changes, merger 

announcements, insolvency, or other unexpected, 

issuer-specific events. 

19NSCC would use a third-party market provider 

to identify index-based exchange-traded funds. The 

third-party market provider would identify indexbased exchange-traded funds as those with criteria 

that requires the portfolio returns to track to a broad 

market index. Exchange-traded funds that do not 

meet this criteria would not be considered indexbased exchange-traded funds and would be 

included the Gap Risk Measure calculation. 

20NSCC believes it is prudent to set a floor for 

the Gap Risk Measure charge, and has determined 

that a floor of 10 percent would appropriately align 

this charge with the charge that is applied to Net 

Unsettled Positions in certain securities that are 

excluded from the VaR Charge and instead charged 

a similar haircut-based volatility component. See 

supra note 12. 

21Supra note 12. 

22NSCC believes using a look-back period of not 

less than ten years that includes a one-year stress 

period would provide it with a stable risk 

measurement that incorporates a sufficient lookback period that would be appropriate for purposes 

of determining the appropriate percent to use in the 

calculation of the Gap Risk Measure. 

additional calculation using a volatility 

estimation that gives even weight to 

market observations over a set look-back 

period would allow it to more 

adequately address risks related to a 

rapid shift in general market price 

volatility levels, which can occur as a 

result of either idiosyncratic, issuer 

events (also referred to as ‘‘gap risk 

events’’),18 or are due to specific 

characteristics of a Member’s portfolio 

based on their size, balance, direction, 

concentration, or the degree of 

correlation with broad market returns. 

The proposed calculation 

incorporating an evenly-weighted 

volatility estimation would give equal 

weight to price observations over a lookback period of at least 253 days. NSCC 

analyzed the impact of using a lookback period of various lengths and 

determined that a look-back period of at 

least 253 days would provide NSCC 

with an adequate view of recent, past 

market observations in estimating 

volatility to meet its backtesting 

performance targets, and wouldn’t result 

in unnecessarily high margin 

calculations. NSCC would weigh these 

considerations periodically to determine 

an appropriate look-back period that is 

at least 253 days. 

NSCC would perform both 

calculations using the parametric VaR 

model—one using the existing EWMA 

volatility estimation and an additional 

calculation using the proposed evenlyweighted volatility estimation—and 

would use the highest result of these 

calculations as the Core Parametric 

Estimation in connection with 

calculating a Member’s VaR Charge. 

NSCC believes that, while the existing 

EWMA calculation provides adequate 

responsiveness to increasing market 

volatility, as described above, the 

proposed evenly-weighted calculation 

would be better at covering the risk of 

a rapid change in market volatility 

levels by retaining market observations 

from the entire historical data set. 

Therefore, by using both calculations 

and selecting the higher result, NSCC 

would be able to more effectively cover 

its credit exposures and mitigate the risk 

presented by different market 

conditions in arriving at a final Core 

Parametric Estimation. 

In order to implement the proposed 

change, NSCC would amend Procedure 

XV of the Rules by creating a new 

subjection (I) to Sections I(A)(1)(a)(i) 

and I(A)(2)(a)(i) of the Rules, which 

would define the Core Parametric 

Estimate as the higher result of two 

calculations—and EWMA calculation 

and the proposed evenly-weighted 

calculation—both utilizing the 

parametric VaR model. 

Gap Risk Measure. NSCC is also 

proposing to introduce the Gap Risk 

Measure as an additional calculation 

that, when applicable, would be used to 

determine a Member’s final VaR Charge. 

The proposed Gap Risk Measure 

would be calculated to address the risks 

presented by a portfolio that is more 

susceptible to the effects of gap risk 

events due to the idiosyncratic nature of 

the Net Unsettled Positions in that 

portfolio. For example, the proposed 

calculation would address the risk that 

a gap risk event affects the price of a 

security in which a portfolio holds a Net 

Unsettled Position that represents more 

than a certain percent of the entire 

portfolio’s value, such that the event 

could impact the entire portfolio’s 

value. The proposed Gap Risk Measure 

would supplement the calculation of the 

Core Parametric Estimation because a 

parametric VaR model calculation is not 

designed to fully capture this specific 

risk presented by a concentrated 

position in a Member’s portfolio. 

The proposed Gap Risk Measure 

would only be applied for a Member if 

the Net Unsettled Position with the 

largest absolute market value in the 

portfolio represents more than a certain 

percent of the entire portfolio’s value 

(‘‘concentration threshold’’). NSCC is 

proposing a concentration threshold to 

the application of the Gap Risk Measure 

because its backtesting results have 

shown that portfolios with a Net 

Unsettled Position that represents a 

proportional value of the entire portfolio 

over 30 percent tend to have backtesting 

coverage below the target 99 percent 

confidence level. These results also 

show that these portfolios are more 

susceptible to the effects of gap risk 

events that the proposed calculation is 

designed to measure. Therefore, NSCC 

would only apply the Gap Risk Measure 

charge if the Net Unsettled Position 

with the largest absolute market value in 

a Member’s portfolio represents more 

than 30 percent of that Member’s entire 

portfolio value. NSCC would set 30 

percent as the ceiling for the 

concentration threshold, and would 

evaluate the threshold periodically 

based on the Member’s backtesting 

results during a time period of not less 

than the previous twelve months to 

determine if it may be appropriate to the 

threshold at a lower percent. 

Additionally, NSCC believes the risk 

of large, unexpected price movements, 

particularly those caused by a gap risk 

event, may have a greater impact on 

portfolios with large Net Unsettled 

Positions in securities that are 

susceptible to those events. Generally, 

index-based exchange-traded funds 

track closely to similar equity indices 

and are less prone to the effects of gap 

risk events. As such, if the 

concentration threshold is met, NSCC 

would calculate the Gap Risk Measure 

for Net Unsettled Positions in the 

portfolio, other than positions in indexbased exchange traded funds (referred to 

herein for ease of reference as ‘‘nonindex Net Unsettled Positions’’).19

When applicable, NSCC would 

calculate the Gap Risk Measure by 

multiplying the gross market value of 

the largest non-index Net Unsettled 

Position in the portfolio by a percent of 

not less than 10 percent.20 NSCC would 

determine such percent empirically as 

no less than the larger of the 1st and 

99th percentiles of three-day returns of 

a set of CUSIPs that are subject to the 

VaR Charge pursuant to the Rules,21

giving equal rank to each to determine 

which has the highest movement over 

that three-day period. NSCC would use 

a look-back period of not less than ten 

years that includes a one-year stress 

period.22 If the one-year stress period 

overlaps with the look-back period, only 

the non-overlapping period would be 

combined with the look-back period. 

The result would then be rounded up to 

the nearest whole percentage. 

By calculating this charge as a percent 

of the gross market value of the largest 

non-index Net Unsettled Position that 

exceeds the set threshold, NSCC 

believes the proposed Gap Risk Measure 

would allow it to capture the risk that 

a gap risk event affects the price of a 

security in which the Member holds a 

concentrated position and, due to the 

disproportionate value of this position 

in the Member’s portfolio, the impact of 


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23For example, if the market value of the long Net 

Unsettled Positions is $100,000, and the market 

value of the short Net Unsettled Positions is 

$200,000, the net directional market value of the 

portfolio is $100,000. 

24For example, if the market value of the long Net 

Unsettled Positions is $100,000, and the market 

value of the short Net Unsettled Positions is 

$110,000, the balanced market value of the portfolio 

is $100,000. 

25NSCC would use a third-party market provider 

to identify these transaction costs and other basis 

risks. 

26See Procedure XV, Section I(A)(1)(d) of the 

Rules, supra note 4. 27NSCC does not apply the excess net capital 

offset for Members rated 7 on the Credit Risk Rating 

Matrix. See Procedure XV, Sections I(A)(1)(d) and 

I(A)(2)(c) of the Rules, supra note 4. 

that event affects the entire portfolio. 

This calculation, as an additional 

measure for the VaR Charge, would 

permit NSCC to assess an adequate 

amount of margin to cover the gap risks 

not captured by the parametric VaR 

model calculations. As such, the 

proposed calculation would contribute 

to NSCC’s goal of producing margin 

levels commensurate with the risks and 

particular attributes of each Member’s 

portfolio. 

In order to implement this proposed 

change, NSCC would amend Procedure 

XV of the Rules by creating a new 

subjection (II) to Sections I(A)(1)(a)(i) 

and I(A)(2)(a)(i) of the Rules, which 

would describe the calculation of the 

Gap Risk Measure. 

Portfolio Margin Floor. NSCC is also 

proposing to introduce the Portfolio 

Margin Floor as an additional 

calculation that, when applicable, 

would be used to determine a Member’s 

final VaR Charge. 

The proposed Portfolio Margin Floor 

would be calculated to address risks 

that may not be adequately accounted 

for in the other calculations of the VaR 

Charge by operating as a floor to, or 

minimum amount of, the final VaR 

Charge. A parametric VaR model may 

result in a low VaR Charge for balanced 

portfolios. For example, in 

circumstances where the gross market 

value of a Member’s Net Unsettled 

Positions is high and the cost of 

liquidation in the event that Member 

defaults could also be high, the 

parametric VaR model may not 

adequately measure the potential costs 

of liquidation. The proposed charge 

would be based on the balance and 

direction of Net Unsettled Positions in 

the Members’ portfolio and is designed 

to be proportional to the market value 

of the portfolio. In this way, the 

Portfolio Margin Floor would allow 

NSCC to more effectively cover its credit 

exposures. 

The Portfolio Margin Floor would be 

the sum of two separate calculations, 

both of which would measure the 

market value of the portfolio based on 

the direction of Net Unsettled Positions 

in that portfolio. In this way, the 

calculation would effectively set a floor 

on the VaR Charge based on the 

composition of the portfolio and would 

mitigate the risk that low price volatility 

in portfolios with either large gross 

market values or large net directional 

market values could hinder NSCC’s 

ability to effectively liquidate or hedge 

the Member’s portfolio in three business 

days. 

First, NSCC would calculate the net 

directional market value of the portfolio 

by calculating the absolute difference 

between the market value of the long 

Net Unsettled Positions and the market 

value of the short Net Unsettled 

Positions in the portfolio,23 and then 

multiplying that amount by a 

percentage. Such percentage would be 

determined by examining the annual 

historical volatility levels of benchmark 

equity indices over a historical lookback period, as a standard and generally 

accepted reference that incorporates 

sufficient data history. Second, NSCC 

would calculate the balanced market 

value of the portfolio by taking the 

lowest market value of either (i) the long 

Net Unsettled Positions, or (ii) the short 

Net Unsettled Positions in the 

portfolio,24 and then multiplying that 

value by a percentage. Such percentage 

would generally be a fraction of the 

percentage used in the calculation of the 

net directional market value of the 

portfolio and would be an amount that 

covers the transaction costs and other 

basis risks present for the Net Unsettled 

Positions in that portfolio.25

NSCC would add the results of these 

two calculations to arrive at the final 

Portfolio Margin Floor amount. The sum 

of these two calculations would provide 

a minimum VaR Charge by effectively 

establishing a margin floor for certain 

portfolios that may not be effectively 

assessed in the other calculations of the 

VaR Charge. NSCC would compare the 

Portfolio Margin Floor result with the 

Gap Risk Measure, when applicable, 

and the Core Parametric Estimation and 

would use the highest of the three 

calculations as the final VaR Charge for 

each Member, as applicable. 

In order to implement this proposed 

change, NSCC would amend Procedure 

XV of the Rules by creating a new 

subjection (III) to Sections I(A)(1)(a)(i) 

and I(A)(2)(a)(i) of the Rules, which 

would describe the calculation of the 

Portfolio Margin Floor. 

(iii) Eliminating the MMD Charge 

Finally, NSCC is proposing to 

eliminate the MMD Charge from its 

Clearing Fund calculation. The MMD 

Charge is an existing component of the 

Clearing Fund formula and is calculated 

for Members that are Market Makers and 

Members that clear for Market Makers.26

The charge was introduced during a 

period of rapid growth in the adaptation 

of the internet, and was developed to 

address the risks presented by 

concentrated positions held specifically 

by Market Makers. The MMD Charge is 

described in Procedure XV of the Rules, 

which provides that, if the Market 

Maker (either the Member or the 

correspondent of the Member) holds a 

Net Unsettled Position that is greater 

than 40 percent of the overall unsettled 

long position (sum of each clearing 

broker’s net long position) in that 

security in the CNS system, NSCC may 

impose the MMD Charge. NSCC 

calculates the MMD charge as the sum 

of each of the absolute values of the Net 

Unsettled Positions in these securities, 

less the reported amount of excess net 

capital for that Member.27 The MMD 

charge is designed to address dominated 

securities that are susceptible to 

marketability and liquidation 

impairment because of the relative size 

of the Net Unsettled Positions that 

NSCC would have to liquidate or hedge 

in the case of Member default. 

Since the MMD Charge was 

implemented, the U.S. equities market 

has evolved with improved price 

transparency, access across exchange 

venues, and participation by market 

liquidity providers to reduce the risks 

that the charge was designed to address. 

Further, NSCC believes the MMD 

Charge may not effectively address 

concentration risk because (1) it only 

applies to Net Unsettled Positions in 

certain dominated securities, as 

described above and currently in 

Procedure XV of the Rules; (2) it does 

not address concentration risk presented 

by Net Unsettled Positions in securities 

that are not listed on NASDAQ or in 

securities traded by firms that are not 

Market Makers; and (3) it does not 

account for concentration in market 

capitalization categories. 

NSCC also believes that the proposed 

enhancements to the VaR Charge, 

specifically the introduction of an 

evenly-weighted volatility measure and 

the calculation of the Gap Risk Measure, 

would provide it with more effective 

measures of risks related to 

concentrated positions in its Members’ 

portfolios. Subject to applicable 

thresholds, these proposed risk 

measures would be applicable to all 

Members as part of the calculation VaR 

Charge, and would not, like the MMD 


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2832 Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices 

28For example, pursuant to existing authority 

under Procedure XV, Sections I(A)(1)(e) and 

I(A)(2)(d) of the Rules (to be re-numbered pursuant 

this proposed rule change to Sections I(A)(1)(d) and 

I(A)(2)(c) of Procedure XV of the Rules), NSCC may 

require an additional payment as part of a Member’s 

Required Deposit in the event it observes price 

fluctuations in or volatility or lack of liquidity of 

any security that are not otherwise addressed by its 

VaR Charge or the other components of the Clearing 

Fund. An example of where this additional 

payment may be required is in circumstances where 

NSCC identifies an exposure that is not adequately 

addressed by its margining methodology. Supra 

note 4. 

29 15 U.S.C. 78s(b)(1). 

30 12 U.S.C. 5465(e)(1). 

31 15 U.S.C. 78q–1(b)(3)(F). 

32 17 CFR 240.17Ad–22(e)(4)(i) and (e)(6)(i) and 

(v). 

33 15 U.S.C. 78q–1(b)(3)(F). 

34 Id. 

35 17 CFR 240.17Ad–22(e)(4)(i). 

Charge, be limited to positions held by 

Market Makers. Further, as a thresholdbased calculation, the Gap Risk Measure 

would provide NSCC with a more 

appropriate measure of the potential 

risk presented by a large Net Unsettled 

Position in a portfolio. Therefore, NSCC 

believes that these proposed 

enhancements to the VaR Charge and 

other existing risk management 

measures (described below) would 

provide it with more effective measures 

of the risks presented by concentrated 

positions, and, as such, it is appropriate 

to eliminate the MMD Charge. 

In order to implement this proposed 

change, NSCC would amend Procedure 

XV of the Rules by removing subsection 

(d) of Section I(A)(1) and subsection (c) 

of Section I(A)(2) of the Rules, and 

renumbering the subsequent subsections 

accordingly. 

(iv) Mitigating Risks of Concentrated 

Positions 

For the reasons described above, 

NSCC believes that the proposed 

enhancements to its VaR Charge would 

allow it to better measure and mitigate 

the risks presented by certain Net 

Unsettled Positions, including the risk 

presented to NSCC when those 

positions are concentrated in a 

particular security. One of the risks 

presented by a Net Unsettled Position 

concentrated in an asset class is that 

NSCC may not be able to liquidate or 

hedge the Net Unsettled Positions of a 

defaulted Member in the assumed 

timeframe at the market price in the 

event of a Member default. Because 

NSCC relies on external market data in 

connection with monitoring exposures 

to its Members, the market data may not 

reflect the market impact transaction 

costs associated with the potential 

liquidation as the concentration risk of 

a Net Unsettled Position increases. 

However, NSCC believes that, through 

the proposed changes and through 

existing risk management measures,28 it 

would be able to effectively measure 

and mitigate risks presented when a 

Member’s Net Unsettled Positions are 

concentrated in a particular security. 

NSCC will continue to evaluate its 

exposures to these risks. Any future, 

proposed changes to the margining 

methodology to address such risks 

would be subject to a separate proposed 

rule change pursuant to Section 19(b)(1) 

of the Act,29 and the rules thereunder, 

and advance notice pursuant to Section 

806(e)(1) of the Clearing Supervision 

Act,30 and the rules thereunder. 

2. Statutory Basis 

NSCC believes that the proposed 

changes described above are consistent 

with the requirements of the Act and the 

rules and regulations thereunder 

applicable to a registered clearing 

agency. In particular, NSCC believes 

that the proposed changes are consistent 

with Section 17A(b)(3)(F) of the Act,31

and Rules 17Ad–22(e)(4)(i) and (e)(6)(i) 

and (v), each promulgated under the 

Act,32 for the reasons described below. 

Section 17A(b)(3)(F) of the Act 33

requires that the rules of NSCC be 

designed to, among other things, assure 

the safeguarding of securities and funds 

which are in the custody or control of 

the clearing agency or for which it is 

responsible. As discussed above, NSCC 

is proposing a number of changes to the 

way it calculates the VaR Charge, one of 

the components of its Members’ 

Required Deposits—a key tool that 

NSCC uses to mitigate potential losses 

to NSCC associated with liquidating a 

Member’s portfolio in the event of 

Member default. NSCC believes the 

proposed changes are designed to assure 

the safeguarding of securities and funds 

which are in its custody or control or for 

which it is responsible because they are 

designed to enable NSCC to better limit 

its exposure to Members in the event of 

a Member default. 

First, NSCC’s proposal to introduce an 

additional calculation using its 

parametric VaR model that uses an 

evenly-weighted volatility estimation 

would better enable NSCC to limit its 

exposures to Members by enhancing the 

calculation of the VaR Charge to better 

cover the risk of a rapid change in 

market price volatility levels, including, 

for example, a drop in portfolio 

volatility in a stabilizing market. 

Second, the proposal to introduce the 

Gap Risk Measure calculation as an 

additional measure of volatility in 

connection with the calculation of the 

VaR Charge would better enable NSCC 

to limit its exposures to Members by 

more effectively capturing the risk that 

gap risk events impact the entire 

portfolio’s value due to the idiosyncratic 

nature of the Net Unsettled Positions in 

that portfolio. Third, the proposal to 

introduce the Portfolio Margin Floor in 

its calculation of a Member’s VaR 

Charge would enable NSCC to better 

limit its exposures to Members by better 

capturing the risks that may not be 

adequately accounted for in the other 

calculations of the VaR Charge. Finally, 

NSCC’s proposal to eliminate the MMD 

Charge would enable NSCC to remove a 

component of the Required Deposit that 

provides NSCC with only a limited 

measure of risks presented by Net 

Unsettled Positions that are 

concentrated in certain securities, 

which NSCC believes it can more 

adequately measure through other 

proposed and existing risk management 

measures, as described above. 

By enabling NSCC to better limit its 

exposure to Members, the proposed 

changes are designed to ensure that, in 

the event of Member default, NSCC’s 

operations would not be disrupted and 

non-defaulting Members would not be 

exposed to losses they cannot anticipate 

or control. In this way, the proposed 

rules are designed to assure the 

safeguarding of securities and funds 

which are in the custody or control of 

NSCC or for which it is responsible and 

therefore consistent with Section 

17A(b)(3)(F) of the Act.34

Rule 17Ad–22(e)(4)(i) under the Act 35

requires, in part, that NSCC establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to effectively 

identify, measure, monitor, and manage 

its credit exposures to participants and 

those arising from its payment, clearing, 

and settlement processes, including by 

maintaining sufficient financial 

resources to cover its credit exposure to 

each participant fully with a high degree 

of confidence. 

As described above, the proposed 

changes would enable NSCC to better 

identify, measure, monitor, and, through 

the collection of Members’ Required 

Deposits, manage its credit exposures to 

Members by maintaining sufficient 

resources to cover those credit 

exposures fully with a high degree of 

confidence. Each of the additional 

calculations that NSCC is proposing to 

introduce to enhance its methodology 

for calculating a Member’s VaR Charge 

would provide NSCC with a more 

effective measure of the risks these 

calculations were designed to assess, as 

described above. As such, the proposed 


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Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices 2833 

36 Id. 

37 17 CFR 240.17Ad–22(e)(6)(i). 

38 17 CFR 240.17Ad–22(e)(6)(v). 39 17 CFR 240.17Ad–22(e)(6)(i) and (v). 

40 15 U.S.C. 78q–1(b)(3)(F). 

41 17 CFR 240.17Ad–22(e)(4)(i) and (e)(6)(i) and 

(v). 

enhancements to the calculation of the 

VaR Charge would permit NSCC to more 

effectively identify, measure, monitor 

and manage its exposures to market 

price risk, and would enable it to better 

limit its exposure to potential losses 

from Member default. The proposal to 

use the highest result of each of the 

calculations as among the Core 

Parametric Estimation, the Gap Risk 

Measure and the Portfolio Margin Floor, 

would enable NSCC to manage its credit 

exposures by allowing it to collect and 

maintain sufficient resources to cover 

those exposures fully and with a high 

degree of confidence. 

Furthermore, removing the MMD 

Charge would enable NSCC to remove 

from the Clearing Fund calculations a 

component that is limited in scope and 

would allow it to address the risks 

presented by Net Unsettled Positions 

that are concentrated in certain 

securities more effectively by other 

Clearing Fund components and risk 

management measures. 

Therefore, the proposal would 

enhance NSCC’s ability to effectively 

identify, measure and monitor its credit 

exposures and would enhance its ability 

to maintain sufficient financial 

resources to cover its credit exposure to 

each participant fully with a high degree 

of confidence. As such, NSCC believes 

the proposed changes are consistent 

with Rule 17Ad–22(e)(4)(i) under the 

Act.36

Rule 17Ad–22(e)(6)(i) under the Act 37

requires, in part, that NSCC establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to cover its credit 

exposures to its participants by 

establishing a risk-based margin system 

that, at a minimum, considers, and 

produces margin levels commensurate 

with, the risks and particular attributes 

of each relevant product, portfolio, and 

market. Rule 17Ad–22(e)(6)(v) under the 

Act 38 requires, in part, that NSCC 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to cover its credit 

exposures to its participants by 

establishing a risk-based margin system 

that, at a minimum, uses an appropriate 

method for measuring credit exposure 

that accounts for relevant product risk 

factors and portfolio effects across 

products. 

The Required Deposits are made up of 

risk-based components (as margin) that, 

that are calculated and assessed daily to 

limit NSCC’s credit exposures to 

Members. NSCC’s proposal to enhance 

the calculation of its VaR Charge in 

order to more effectively address market 

price volatility would permit it to 

produce margin levels that are 

commensurate with the particular risk 

attributes, including risks related to 

rapid changes in market price volatility 

levels due to gap risk events, or risks 

related to a unique composition of 

securities within a portfolio, as 

described above. For example, the use of 

an evenly-weighted volatility estimation 

utilizing the VaR model, as an 

additional calculation of the VaR 

Charge, which gives equal weight to a 

long historical data set, rather than more 

weight to recent observations, would 

permit NSCC to more effectively 

measure the risk of a rapid change in 

market price volatility. The addition of 

the Gap Risk Measure and the Portfolio 

Margin Floor would also provide NSCC 

with additional measurements of the 

market price volatility of a Member’s 

Net Unsettled Position, enabling NSCC 

to assess a VaR Charge that accounts for 

the risks those charges are designed to 

address, as described above. 

Finally, NSCC is proposing to 

eliminate the MMD Charge because this 

component of the Clearing Fund has 

only a limited application and, as such, 

does not provide as effective a 

measurement of the risk presented by 

Net Unsettled Positions that are 

concentrated in certain securities as 

other proposed and existing risk 

management measures. Therefore, the 

proposal to eliminate this charge would 

enable NSCC to remove an unnecessary 

component from the Clearing Fund 

calculation, and would help NSCC to 

rely on an appropriate method of 

measuring its exposures to this risk. 

The proposed changes are designed to 

assist NSCC in maintaining a risk-based 

margin system that considers, and 

produces margin levels commensurate 

with, the risks and particular attributes 

of portfolios that exhibit idiosyncratic 

risk attributes, are more susceptible to 

price volatility caused by to gap risk 

events, and contain concentrated Net 

Unsettled Positions. Therefore, NSCC 

believes the proposed change is 

consistent with Rule 17Ad–22(e)(6)(i) 

and (v) under the Act.39

(B) Clearing Agency’s Statement on 

Burden on Competition 

NSCC believes that the proposed 

changes that would enhance the 

calculation of its VaR Charge could have 

an impact on competition. Specifically, 

NSCC believes that the proposed 

changes could burden competition 

because they would result in larger 

Required Deposit amounts for Members 

when the enhancements result in a VaR 

Charge that is greater than the amount 

calculated pursuant to the current 

methodology. When the proposal results 

in a larger VaR Charge, and, thus, a 

larger Required Deposit, for Members 

that have lower operating margins or 

higher costs of capital compared to 

other Members, the proposed changes 

could burden competition. However, the 

increase in Required Deposit would be 

in direct relation to the market price risk 

presented by each Members’ Net 

Unsettled Positions, and each Member’s 

Required Deposit would continue to be 

calculated with the same parameters 

and at the same confidence level for 

each Member. Therefore, Members that 

present similar Net Unsettled Positions 

would have similar impacts on their 

Required Deposit amounts. As such 

NSCC believe that any burden on 

competition imposed by the proposed 

changes would not be significant and, 

further, would be both necessary and 

appropriate in furtherance of NSCC’s 

efforts to mitigate risks and meet the 

requirements of the Act, as described in 

this filing and further below. 

NSCC believes that the above 

described burden on competition that 

may be created by the proposed changes 

associated with the enhancements to the 

VaR Charge would be necessary in 

furtherance of the Act, specifically 

Section 17A(b)(3)(F) of the Act,40

because, as described above, the Rules 

must be designed to assure the 

safeguarding of securities and funds that 

are in NSCC’s custody or control or 

which it is responsible. NSCC believes 

the proposed changes to enhance the 

VaR Charge would also support NSCC’s 

compliance with Rules 17Ad–22(e)(4)(i) 

and Rule 17Ad–22(e)(6)(i) and (v) under 

the Act,41 which require NSCC to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to (x) 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; (y) cover its credit 

exposures to its participants by 

establishing a risk-based margin system 

that, at a minimum, considers, and 

produces margin levels commensurate 

with, the risks and particular attributes 

of each relevant product, portfolio, and 

market; and (z) cover its credit 


daltland on DSKBBV9HB2PROD with NOTICES
2834 Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices 

42 15 U.S.C. 78q–1(b)(3)(F). 

43 17 CFR 240.17Ad–22(e)(4)(i) and (e)(6)(i) and 

(v). 

44 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

exposures to its participants by 

establishing a risk-based margin system 

that, at a minimum, uses an appropriate 

method for measuring credit exposure 

that accounts for relevant product risk 

factors and portfolio effects across 

products. As described above, NSCC 

believes implementing the proposed 

enhancements to the VaR Charge would 

improve the risk-based methodology 

that NSCC employs to measure market 

price risk and would better limit NSCC’s 

credit exposures to Members, consistent 

with these requirements. 

NSCC believes that the above 

described burden on competition that 

could be created by the proposed 

changes would be appropriate in 

furtherance of the Act because such 

changes have been appropriately 

designed to assure the safeguarding of 

securities and funds which are in the 

custody or control of NSCC or for which 

it is responsible, as described in detail 

above. By introducing additional 

calculations for arriving at a Member’s 

final VaR Charge, each of which are 

designed to address the unique risks 

presented by Members’ Net Unsettled 

Positions, as described above, the 

proposal would allow NSCC to produce 

margin levels commensurate with the 

risks and particular attributes of each 

Member’s portfolio. Therefore, because 

the proposed changes were designed to 

provide NSCC with an appropriate 

measure of the risks presented by 

Members’ Net Unsettled Positions, 

NSCC believes the proposals are 

appropriately designed to meet its risk 

management goals and its regulatory 

obligations. 

NSCC believes that it has designed the 

proposed changes in a reasonable and 

appropriate way in order to meet 

compliance with its obligations under 

the Act. Specifically, implementing the 

proposed enhancements to the 

calculation of its VaR Charge would 

improve the risk-based margining 

methodology that NSCC employs to set 

margin requirements and better limit 

NSCC’s credit exposures to its Members. 

Therefore, NSCC believes the proposed 

changes are necessary and appropriate 

in furtherance of NSCC’s obligations 

under the Act, specifically Section 

17A(b)(3)(F) of the Act 42 and Rules 

17Ad–22(e)(4)(i) and Rule 17Ad– 

22(e)(6)(i) and (v) under the Act.43

Because the proposal to eliminate the 

MMD Charge would remove this charge 

from the margining methodology as 

applied to all Members, when 

applicable, NSCC does not believe the 

proposed change to eliminate the MMD 

Charge would have any impact on 

competition. 

(C) Clearing Agency’s Statement on 

Comments on the Proposed Rule 

Change Received From Members, 

Participants, or Others 

While NSCC has not solicited or 

received any written comments relating 

to this proposal, NSCC has conducted 

outreach to Members in order to provide 

them with notice of the proposal. NSCC 

will notify the Commission of any 

written comments received by NSCC. 

III. Date of Effectiveness of the 

Proposed Rule Change, and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period 

up to 90 days (i) as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or (ii) as to which 

the clearing agency consents, the 

Commission will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

NSCC–2017–020 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549. 

All submissions should refer to File 

Number SR–NSCC–2017–020. 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-rulefilings.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–2017–020 and 

should be submitted on or before 

February 9, 2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.44

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–00851 Filed 1–18–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–82499; File No. SR–Phlx– 

2018–02] 

Self-Regulatory Organizations; Nasdaq 

PHLX LLC; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change To Adopt Pricing for 

NDXP 

January 12, 2018. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on January 3, 

2018, Nasdaq PHLX LLC (‘‘Phlx’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III, below, which Items have been 


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