Federal Register / Vol. 86, No. 156 / Tuesday, August 17, 2021 / Notices 46043 

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

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 91809 (May 

10, 2021), 86 FR 26588 (May 14, 2021) (File No. SR– 

NSCC–2021–005) (‘‘Notice of Filing’’). 

4See Letter from Parsons, Behle & Latimer, 

Counsel for Alpine Securities Corporation, dated 

June 4, 2021, to Vanessa Countryman, Secretary, 

Commission (‘‘Alpine Letter’’), available at https:// 

www.sec.gov/comments/sr-nscc-2021-005/ 

srnscc2021005.htm. 

5NSCC appended an Exhibit 2 to the materials 

filed on April 26, 2021. The appended Exhibit 2 

consists of a comment letter that NSCC received 

from one of its members objecting to NSCC’s 

proposal in response to member outreach NSCC 

conducted in 2019 (‘‘Wachtel Letter’’). See Notice 

of Filing, supra note 3, at 26593. NSCC considered 

that comment in its Proposed Rule Change, and the 

Commission has considered the comment letter in 

making its determination, as discussed in Section 

III below. A copy of the comment letter is available 

at https://www.dtcc.com/-/media/Files/Downloads/ 

legal/rule-filings/2021/NSCC/SR-NSCC-2021- 

005.pdf. 

6 15 U.S.C. 78s(b)(2). 

7Securities Exchange Act Release No. 92250 

(June 24, 2021), 86 FR 34798 (June 30, 2021) (File 

No. SR–NSCC–2021–005). 

8 In Partial Amendment No. 1, NSCC updates the 

proposed rule text filed as Exhibit 5 to the proposed 

rule change to include a legend to indicate a 

delayed implementation date, specifically that the 

rule change would be implemented not later than 

20 business days after Commission approval of the 

Proposed Rule Change. NSCC did not change the 

purpose or substance of, or basis for, the Proposed 

Rule Change. 

9References to the Proposed Rule Change from 

this point forward refer to the Proposed Rule 

Change as modified by Partial Amendment No. 1. 

10Capitalized terms not defined herein are 

defined in NSCC’s Rules and Procedures (‘‘Rules’’), 

available at http://dtcc.com/∼/media/Files/ 

Downloads/legal/rules/nscc_rules.pdf. 

11See Section 1 of Rule 4, id. 

12See Rule 4 (Clearing Fund) and Procedure XV 

(Clearing Fund Formula and Other Matters) of the 

Rules (‘‘Procedure XV’’), supra note 8. The 

minimum Required Fund Deposit amount is 

required to be in cash. See Section II.(A) of 

Procedure XV, supra note 8. 

13See id. 

14See Securities Exchange Act Release No. 81485 

(August 25, 2017), 82 FR 41433 (August 31, 2017) 

(NSCC–2017–008) (adopting Model Risk 

Management Framework and stating that Required 

Fund Deposit backtesting would be performed at 

least on a daily basis); Securities Exchange Act 

Release No. 84458 (October 19, 2018), 83 FR 53925 

(October 25, 2018) (File No. SR–NSCC–2018–009) 

(amending the Model Risk Management Framework 

to provide enhanced governance). 

15See 17 CFR 240.17Ad–22(a)(1). 

16See Notice of Filing, supra note 3, at 26589. 

17See id. 

18See Notice of Filing, supra note 3, at 26589. 

19NSCC states a Member’s backtesting coverage 

would fall below the 99% confidence target if the 

Member has more than two backtesting deficiency 

days in a rolling twelve-month period. See Notice 

of Filing, supra note 3, at 26589. In other words, 

if a Member has three or more backtesting 

deficiency days during a twelve-month period, then 

the Member’s margin would not be sufficient 99% 

of the time. NSCC believes that its targeted 99% 

confidence level is consistent with its regulatory 

requirements under Rule 17Ad–22(e)(4)(i) and 

(e)(6)(iii). 17 CFR 240.17Ad–22 (e)(4)(i), and 

(e)(6)(iii). 

20See Notice of Filing, supra note 3, at 26589. 

21See id. 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–92640; File No. SR–NSCC– 

2021–005] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing of Partial 

Amendment No. 1 and Order Granting 

Accelerated Approval of Proposed 

Rule Change, as Modified by Partial 

Amendment No. 1, To Increase the 

National Securities Clearing 

Corporation’s Minimum Required Fund 

Deposit 

August 11, 2021. 

I. Introduction 

On April 26, 2021, National Securities 

Clearing Corporation (‘‘NSCC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) proposed 

rule change SR–NSCC–2021–005 (the 

‘‘Proposed Rule Change’’) pursuant to 

Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder 2 to increase its 

minimum required fund deposit. The 

Proposed Rule Change was published 

for comment in the Federal Register on 

May 14, 2021,3 and the Commission has 

received comments 4 on the changes 

proposed therein.5 On June 24, 2021, 

pursuant to Section 19(b)(2) of the Act,6

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.7

On August 5, 2021, NSCC filed a partial 

amendment (‘‘Partial Amendment No. 

1’’) to modify the Proposed Rule 

Change.8 The Commission is publishing 

this notice to solicit comments on 

Partial Amendment No. 1 from 

interested persons and is approving the 

Proposed Rule Change, as modified by 

Partial Amendment No. 1, on an 

accelerated basis.9

II. Description of the Proposed Rule 

Change 

Currently, NSCC requires each 

Member to maintain a minimum 

Required Fund Deposit 10 amount of 

$10,000.11 NSCC proposes to increase 

each Member’s minimum Required 

Fund Deposit amount to $250,000. 

A. Background 

NSCC provides central counterparty 

(‘‘CCP’’) services, including clearing, 

settlement, risk management, and a 

guarantee of completion for virtually all 

broker-to-broker trades involving equity 

securities, corporate and municipal debt 

securities, and certain other securities. 

In its role as a CCP, a key tool NSCC 

uses to manage its credit exposure to its 

Members is determining and collecting 

an appropriate Required Fund Deposit 

(i.e., margin) from each Member.12 A 

Member’s Required Fund Deposit serves 

as collateral to mitigate potential losses 

to NSCC associated with the liquidation 

of the Member’s portfolio should that 

Member default. The aggregate of all 

Members’ Required Fund Deposits 

constitutes NSCC’s Clearing Fund, 

which it would access, among other 

instances, should a defaulting Member’s 

own Required Fund Deposit be 

insufficient to satisfy losses to NSCC 

caused by the liquidation of that 

Member’s portfolio.13

NSCC conducts daily backtesting to 

evaluate whether each Member’s 

Required Fund Deposit is sufficient to 

cover NSCC’s credit exposures to that 

Member based on a simulated 

liquidation of the Member’s portfolio on 

that day.14 Backtesting is an ex-post 

comparison of actual outcomes with 

expected outcomes derived from the use 

of margin models.15 A backtesting 

deficiency occurs when NSCC 

determines that the projected 

liquidation losses to NSCC arising in the 

event of a Member’s default would be 

greater than the Member’s Required 

Fund Deposit.16 Therefore, backtesting 

deficiencies highlight exposure that 

could subject NSCC to potential losses 

under normal market conditions in the 

event that a Member defaults.17

NSCC regularly reviews backtesting 

results to assess the effectiveness of its 

margining requirements.18 As part of its 

review, NSCC investigates the causes of 

any backtesting deficiencies, paying 

particular attention to repeat backtesting 

deficiencies that would result in the 

Member’s backtesting coverage to fall 

below the 99% confidence target to 

determine if there is an identifiable 

cause of repeat backtesting 

deficiencies.19 NSCC also evaluates 

whether multiple Members may 

experience backtesting deficiencies for 

the same underlying reason.20

Based on its regular reviews, NSCC 

states it has found that Members with 

Required Fund Deposits below $250,000 

disproportionately experience repeat 

backtesting deficiencies because, should 

the Member’s settlement activity 

abruptly increase, the additional 

exposure to NSCC would not be 

mitigated until the collection of the 

Required Fund Deposit either intraday 

or on the next business day.21 NSCC 

states it has also found that its current 

minimum margin requirement of 

$10,000 is disproportionately lower 


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46044 Federal Register / Vol. 86, No. 156 / Tuesday, August 17, 2021 / Notices 

22See id. For example, the minimum initial 

contribution for The Options Clearing Corporation 

(‘‘OCC’’) is $500,000. See Rule 1002(d) of the OCC 

Rules, available at https://www.theocc.com/ 

components/docs/legal/rules_and_bylaws/occ_

rules.pdf. The minimum Required Fund Deposit for 

both the Government Securities Division (‘‘GSD’’) 

and Mortgage-Backed Securities Division (‘‘MBSD’’) 

of Fixed Income Clearing Corporation (‘‘FICC’’) is 

$100,000. See Rule 4 of FICC GSD Rulebook, 

available at http://www.dtcc.com/∼/media/Files/ 

Downloads/legal/rules/ficc_gov_rules.pdf and Rule 

4 of the FICC MBSD Clearing Rules, available at 

http://www.dtcc.com/∼/media/Files/Downloads/ 

legal/rules/ficc_mbsd_rules.pdf. 

23See supra text accompanying notes 12–16. 

24See supra note 17 and accompanying text. 

25NSCC provided a public summary of the 

information in this Section II.B in its Notice of 

Filing, upon which this discussion is based. See 

Notice of Filing, supra note 3, at 26590–92. NSCC 

filed the data underlying the Impact Study Results 

as a confidential Exhibit 3 to the Proposed Rule 

Change pursuant to 17 CFR 240.24b-2. 

26See supra text accompanying notes 14–15. 

27See supra note 17 and accompanying text. 

28The Clearing Fund backtesting coverage 

represents the daily sufficiency of the aggregate of 

all Members’ margin over a rolling 12-month 

period. As described in Section II.A above, NSCC 

would be able to access the Clearing Fund to cover 

any losses to it should a Member with insufficient 

margin default. See supra text accompanying note 

11. 

29See id. 

30See id. 

31See Notice of Filing, supra note 3, at 26590. Not 

all of the backtesting deficiencies would have been 

eliminated because if the Member’s Required Fund 

Deposit calculation increases to above $250,000 

intraday, due to, for example, increases in trading 

volume and/or adverse mark-to-market adjustments, 

the $250,000 proposed minimum Required Fund 

Deposit would still be insufficient to cover NSCC’s 

exposure between margin collections. See supra 

text accompanying note 19. 

32See Notice of Filing, supra note 3, at 26590. 

33See id. 

34See id. 

35See CPMI IOSCO Quantitative Disclosure 

Results 2019 Q2 (September 25, 2019), available at 

https://www.dtcc.com/-/media/Files/Downloads/ 

legal/policy-and-compliance/CPMI-IOSCOQuantitative-Disclosure-Results-2019-Q2-2.pdf. 

36See Notice of Filing, supra note 3 at 26593. 

37See id. 

38See id. 

39See id. 

40 15 U.S.C. 78s(b)(2)(C). 

41The Commission’s findings are based on its 

review of the Proposed Rule Change, including its 

analysis of the Impact Study Results, which are 

summarized in Section II.B above. See supra note 

23 and accompanying text. 

42 15 U.S.C. 78q–1(b)(3)(F). 

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

44 15 U.S.C. 78q–1(b)(3)(F). 

than the minimum margin requirements 

of other CCPs that clear similar 

securities products.22

Therefore, NSCC proposes to increase 

its minimum Required Fund Deposit 

from $10,000 to $250,000. 

B. Impact Study Results 

To support its proposal, NSCC relies 

upon the results of recent backtesting 

analyses.23 Specifically, NSCC examines 

the backtesting coverage 24 of each of its 

Members during the period from June 3, 

2019 to May 29, 2020, under the current 

$10,000 minimum Required Fund 

Deposit amount compared to 

hypothetical (or ‘‘pro forma’’) minimum 

Required Fund Deposit amounts, 

including the proposed $250,000 

amount and $100,000 (‘‘Impact Study 

Results’’).25 NSCC uses the Impact 

Study Results to show the number of 

Member backtesting deficiencies 26 that 

would have been eliminated during the 

period had NSCC’s minimum Required 

Fund Deposit been $250,000 and 

compared to $100,000. NSCC then uses 

the Impact Study Results to analyze the 

improvement to each Member’s 

backtesting coverage ratio 27 and, taking 

all Members’ backtesting coverage ratio 

results together, to analyze the 

improvement to NSCC’s Clearing Fund 

backtesting coverage.28

During the impact study period under 

the current minimum Required Fund 

Deposit, NSCC observed a total of 227 

Member backtesting deficiencies, and 29 

Members experienced repeat backtesting 

deficiencies causing them to fall below 

the 99% confidence target.29 Members 

with a Required Fund Deposit lower 

than $250,000 accounted for 22% of the 

total backtesting deficiencies and 

constituted approximately 45% of the 

Members whose margin levels fell 

below the 99% confidence target.30

Additionally, NSCC’s twelve-month 

aggregate Clearing Fund backtesting 

coverage was 99.28%. 

A minimum requirement of $250,000 

would have eliminated 44 backtesting 

deficiencies across 13 Members and 

would have eliminated approximately 

88% of the deficiencies that occurred on 

the days when Members maintained a 

Required Fund Deposit of less than 

$250,000.31 Additionally, a minimum 

requirement of $250,000 would have 

improved NSCC’s rolling twelve-month 

coverage for seven Members to above 

the 99% confidence interval.32 NSCC 

states that, if the proposed $250,000 

minimum had been in place, the 

remaining Members still below the 99% 

confidence interval would constitute 

only 27% of Members that fell below 

the 99% confidence target, which is 

comparable to those Members’ overall 

representation as a class of NSCC’s total 

Members.33 Moreover, a minimum 

requirement of $250,000 would have 

increased NSCC’s twelve-month 

aggregate Clearing Fund backtesting 

coverage by 0.14% to 99.41%.34

An increase to $250,000 compared to 

$100,000 would have further reduced 

NSCC’s credit exposure to its Members 

by eliminating ten additional 

backtesting deficiencies from 34 to 44 

total backtesting deficiencies and 

resulting in increasing two additional 

Members’ margin levels to above the 

99% confidence interval from five 

Members to seven Members. 

Additionally, NSCC’s aggregate Clearing 

Fund backtesting coverage would have 

improved from 99.38% to 99.41% 

representing an increase of 0.03%. 

NSCC had approximately 150 total 

Members during the impact study 

period.35 Of those, 46 Members would 

be impacted by the proposed $250,000 

minimum Required Fund Deposit.36 On 

average, 18 Members maintained excess 

deposits greater than the proposed 

increase; therefore, 28 Members on 

average would have been required to 

deposit additional funds if the proposal 

had been implemented.37 In addition, 

the 46 Members that would be impacted 

by the proposed $250,000 minimum 

Required Fund Deposit maintained 

excess net capital or equity capital (as 

applicable) (‘‘ENC’’) in excess of 

$800,000 on average over the Impact 

Study Period, ranging between an 

average of $834,000 to $211.5 billion, 

with 98% of the impacted Members 

having on average an ENC above $2.5 

million.38 NSCC states it used ENC in its 

analysis to estimate impacted Members’ 

ability to satisfy additional Required 

Fund Deposit amounts required by the 

proposal.39

III. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Act 40

directs the Commission to approve a 

proposed rule change of a selfregulatory organization if it finds that 

such proposed rule change is consistent 

with the requirements of the Act and the 

rules and regulations thereunder 

applicable to such organization. After 

careful consideration, the Commission 

finds that the Proposed Rule Change is 

consistent with the requirements of the 

Act and the rules and regulations 

applicable to NSCC.41 In particular, the 

Commission finds that the Proposed 

Rule Change is consistent with Section 

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

and Rules 17Ad–22(e)(4) and (e)(6) 

thereunder.43

A. Consistency With Section 

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

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

requires, in part, that the rules of a 

clearing agency, such as NSCC, be 

designed, in part, 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.44 The Commission believes 


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45See supra text accompanying note 15. 

46See supra text accompanying notes 29–31. 

47 In addition to its arguments about the Proposed 

Rule Change, one commenter also asserts that 

NSCC’s other recent efforts to increase capital or 

methodology-based margin requirements represent 

unfair discrimination against Members who deal in 

stocks trading in the OTC Markets, inconsistent 

with Section 17A(b)(3)(F) of the Act. See Alpine 

Letter, supra note 4, at 4–5. However, the Proposed 

Rule Change would not amend NSCC’s capital or 

methodology-based margin requirements and is 

limited to the amendment of the minimum 

Required Fund Deposit amount. Therefore, the 

commenter’s arguments pursuant to Section 

17A(b)(3)(F) of the Act are outside the scope of this 

Proposed Rule Change. The commenter also argues 

that NSCC should instead eliminate risk by 

shortening the settlement cycle, rather than 

monetizing risk through increased margin 

requirements, such as under this Proposed Rule 

Change. See Alpine Letter, supra note 4, at 7–8. 

However, the Proposed Rule Change is limited to 

NSCC’s minimum Required Fund Deposit amount 

in order to manage risk under the current settlement 

cycle. Therefore, the commenter’s arguments 

related to shortening the settlement cycle are 

likewise outside the scope of this Proposed Rule 

Change. 

48 15 U.S.C. 78q–1(b)(3)(I). 

49See Bradford National Clearing Corp., 590 F.2d 

1085, 1105 (D.C. Cir. 1978) (‘‘Bradford’’). 

50

51 15 U.S.C. 78q–1(b)(3)(I). Specifically, as 

discussed in greater detail in Section III.C and III.D 

below, the Proposed Rule Change is necessary and 

appropriate to further the policy goals under Rule 

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

22(e)(4)(i) and (e)(6)(iii). 

52See supra text accompanying notes 12–15. 

53See supra text accompanying note 44. See also, 

supra text accompanying notes 29–31. 

54See supra notes 34–37 and accompanying text. 

98% of the impacted Members had, on average, an 

ENC above $2.5 million. Therefore, on average, 2% 

of the 46 impacted Members would maintain ENC 

below $2.5 million, which equals approximately 

one Member who could be required to hold 9.6% 

or more of its ENC on deposit at NSCC. 

55NSCC represents it would continue to require 

that Members pay an amount equal to the minimum 

Required Fund Deposit amount in cash. See Notice 

of Filing, supra note 3, at 26590. 

56See Wachtel Letter, supra note 5. 

57The commenter concludes the Proposed Rule 

Change will ‘‘undoubtedly put some members out 

of business.’’ See Alpine Letter, supra note 4, at 5. 

Based on its consideration of the ENC data, as 

discussed above, the Commission does not agree 

with the commenter’s argument. See supra text 

accompanying notes 51–52. 

that the Proposed Rule Change is 

consistent with Section 17A(b)(3)(F) of 

the Act. 

As discussed in Section II.A above, 

backtesting deficiencies highlight when 

a Member’s margin is insufficient to 

cover NSCC’s credit exposure to that 

Member.45 If a defaulted Member’s 

margin is insufficient to satisfy losses 

caused by the closeout of that Member’s 

positions, NSCC and its non-defaulting 

Members may be subject to losses. As 

summarized in Section II.B above, the 

proposed increase would have provided 

NSCC with additional resources, which 

would have resulted in a decrease in 

backtesting deficiencies and thus a 

reduction in credit exposure to its 

Members under the proposal.46

Therefore, the Commission believes 

NSCC would improve the probability 

that the increased minimum margin 

amount it collects is sufficient to cover 

NSCC’s credit exposure to those 

Members, particularly in instances 

where the defaulted Member’s clearing 

activity abruptly increases following a 

period of low or no activity. This 

increase, in turn, could reduce the 

possibility that NSCC or its nondefaulting Members face losses from the 

close-out process. 

Moreover, NSCC would continue to 

require that Members pay an amount 

equal to the minimum Required Fund 

Deposit amount in cash. Therefore, the 

proposal would enable NSCC to have 

available additional collateral that is 

easier for NSCC to access quickly to 

complete end of day settlement upon a 

Member’s default, further reducing the 

risk of losses to NSCC or non-defaulting 

Members. Accordingly, the Commission 

believes the Proposed Rule Change 

would promote the safeguarding of 

securities and funds which are in the 

custody or control of NSCC or for which 

NSCC is responsible, consistent with 

Section 17A(b)(3)(F) of the Act.47

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

of the Act 

Section 17A(b)(3)(I) of the Act 

requires that the rules of a clearing 

agency do not impose any burden on 

competition not necessary or 

appropriate in furtherance of the Act.48

This provision does not require the 

Commission to find that a proposed rule 

change represents the least anticompetitive means of achieving the 

goal.49 Rather, it requires the 

Commission to balance the competitive 

considerations against other relevant 

policy goals of the Act.50

The Commission acknowledges that 

the impact of increased margin 

requirements will likely present higher 

costs to some Members with lower 

operating margins, lower cash reserves 

or higher costs of capital compared to 

other Members, which may weaken 

those Members’ competitive positions 

relative to others. For example, certain 

smaller Members could be required to 

make and hold an additional deposit of 

up to $240,000 to the Clearing Fund, 

which would limit the smaller 

Member’s ability to utilize that cash for 

other operating or investing purposes. 

Although some of NSCC’s Members 

could experience a burden on 

competition because of these higher 

costs, the Commission concludes any 

burden to these Members is necessary 

and appropriate in furtherance of the 

policy goals under the Act 51 for the 

following reasons. 

As discussed in Section II.A above, 

NSCC seeks to maintain sufficient 

resources (i.e., margin) to cover its credit 

exposures to its Members fully with a 

high degree of confidence. Conversely, 

NSCC uses backtesting to determine 

when a Member’s margin would have 

been insufficient to cover NSCC’s credit 

exposure to that Member.52 As 

previously discussed, the Impact Study 

Results show the proposed $250,000 

minimum Required Fund Deposit 

would have decreased the number of 

backtesting deficiencies, thereby 

increasing the number of Members for 

which NSCC maintained sufficient 

coverage at a confidence level of at least 

99%.53 Therefore, the Proposed Rule 

Change would enable NSCC to better 

manage its credit exposure to its 

Members by ensuring it holds sufficient 

collateral to cover that exposure, 

thereby reducing the likelihood that 

NSCC or non-defaulting Members 

would incur losses resulting from a 

Member default. 

Additionally, based on the 

information set forth in Section II.B 

above regarding the average ENC of the 

impacted Members,54 the Commission 

believes that the vast majority of 

impacted Members likely would not 

experience a weakened competitive 

position compared to others as a result 

of the Proposed Rule Change. The 

average ENC data shows that almost all 

of the impacted Members would likely 

be able to satisfy the additional cash 

deposits needed to comply with the 

Proposed Rule Change with minimal 

impact to the Members’ financials.55

Commenters have raised concerns 

regarding the Proposed Rule Change in 

light of its potential competitive impact 

on certain NSCC Members. Specifically, 

one commenter objects to the proposed 

increase to $250,000, stating that 

NSCC’s current Rules are more than 

adequate to guard against risk at the 

small firm-level and that the increase 

would be purely a tax on the smallest, 

inactive and lowest risk firms.56

Another commenter similarly objects to 

the proposed change stating the increase 

would disproportionately affect NSCC’s 

smallest Members.57 The Commission 

disagrees for the reasons discussed 

above, which indicate that the proposed 

increase would increase Members’ 

Required Fund Deposits proportional to 

the risks posed by those Members. 

Moreover, as discussed in Section II.A 

above, it is possible that, in certain 

circumstances, the current minimum 

Required Fund Deposit amount would 


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58See supra text accompanying notes 17–19. 

59See supra text accompanying note 29. 

60 15 U.S.C. 78q–1(b)(3)(I). 

61 17 CFR 240.17Ad–22(e)(4)(i). 

62See supra text accompanying notes 29–32. 

63See supra note 52. See also, Notice of Filing, 

supra note 3, at 26590. 

64 17 CFR 240.17Ad–22(e)(4)(i). 

65 17 CFR 240.17Ad–22(e)(6)(iii). 

66See supra text accompanying note 49. 

67See supra text accompanying notes 16–18. 

68See supra text accompanying notes 29–31. See 

also, supra text accompanying notes 17–19. 

be insufficient to manage NSCC’s credit 

exposure to participants between 

margin collections should, for example, 

the Member’s clearing activity abruptly 

increase.58 As summarized in Section 

II.B above, the Impact Study Results 

show that approximately 88% of the 

deficiencies that occurred on the days 

when Members maintained a Required 

Fund Deposit of less than $250,000 

would have been eliminated, which 

indicates the proposed increase to 

$250,000 would have mitigated this 

risk.59 Seven of the 28 Members that 

would have to provide some additional 

funding still held an average actual 

clearing fund deposit of above $250,000 

during the Impact Study Period, ranging 

from approximately $315,000 to $1.7M. 

In other words, there would have been 

many days during the study period 

where those seven Members would not 

have to provide additional funding. 

Additionally, four of the remaining 21 

Members that would have to provide 

some additional funding had an average 

ENC below $5 million, ranging from 

$834,000 to $4.8 million, during the 

Impact Study Period, while 11 of the 21 

Members had an average ENC above 

$100 million during the same period. 

For those 28 Members, the number of 

backtesting deficiencies ranged from 

zero and 22 based on the $10,000 

minimum Required Fund Deposit 

compared to zero and five had the 

$250,000 minimum Required Fund 

Deposit been in place during the Impact 

Study Period. Moreover, the average 

number of backtesting deficiencies of 

the 28 Members would have decreased 

from 1.54 to 0.41 per Member had the 

$250,000 minimum Required Fund 

Deposit been in place during the study 

period. For the 14 Members impacted 

with backtesting deficiencies, the largest 

deficiency was $1.3 million and the 

smallest deficiency was $11,000 (out of 

50 total deficiencies). Under the 

proposed minimum Required Fund 

Deposit of $250,000, there would only 

be six deficiencies across four members, 

with a maximum deficiency of $1.1 

million and a minimum deficiency of 

$11,000. 

One commenter further states that it 

would not object to an increase to a 

$100,000 Required Fund Deposit. 

However, as discussed in Section II.B 

above, an increase to $250,000 

compared to $100,000 would have 

further reduced NSCC’s credit exposure 

to its Members by eliminating ten 

additional backtesting deficiencies 

resulting in NSCC maintaining 

sufficient margin levels for two 

additional Members to above the 99% 

confidence interval. Therefore, the 

Commission concludes that any 

competitive burden to Members 

imposed by the Proposed Rule Change 

is necessary and appropriate in 

furtherance of the Act. Accordingly, the 

Commission finds that the Proposed 

Rule Change is consistent with the 

requirements of Section 17A(b)(3)(I) of 

the Act.60

C. Consistency With Rule 17Ad– 

22(e)(4)(i) 

Rule 17Ad–22(e)(4)(i) requires 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.61

As described above in Section II.A, 

NSCC and its non-defaulting Members 

may be subject to losses should a 

defaulted Member’s own Required Fund 

Deposit be insufficient to satisfy losses 

caused by the liquidation of that 

Member’s portfolio. As summarized in 

Section II.B above,62 the Impact Study 

Results show a $250,000 minimum 

Required Fund Deposit would have 

decreased the number of backtesting 

deficiencies, which would likely help 

NSCC better manage its credit exposure 

to each of its Members and credit 

exposures arising from its payment, 

clearing, and settlement processes. 

Additionally, as discussed in Sections 

II.A and III.B above, NSCC would 

continue to require that Members pay an 

amount equal to the minimum Required 

Fund Deposit amount in cash,63 which 

should enable NSCC to better maintain 

sufficient prefunded margin to mitigate 

potential future exposures to its 

Members. Therefore, requiring the 

proposed minimum $250,000 deposit to 

be made in cash should reduce the 

probability that NSCC or non-defaulting 

Members would incur losses resulting 

from a Member default. Accordingly, 

the Commission finds that NSCC’s 

proposed increase to its minimum 

Required Fund Deposit would be 

consistent with Rule 17Ad–22(e)(4)(i).64

D. Consistency with Rule 17Ad– 

22(e)(6)(iii) 

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

requires that a covered clearing agency 

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, calculates margin 

sufficient to cover its potential future 

exposure to Members in the interval 

between the last margin collection and 

the close out of positions following a 

Member default.65

As summarized in Section III.B 

above,66 NSCC employs daily 

backtesting to determine the adequacy 

of each Member’s Required Fund 

Deposit paying particular attention to 

Members that have backtesting 

deficiencies below the 99% confidence 

target.67 Such backtesting deficiencies 

highlight exposure that could subject 

NSCC to potential losses if a Member 

defaults. 

Based on the Impact Study Results, 

which the Commission has reviewed 

and analyzed, approximately 22% of all 

backtesting deficiencies occur for those 

Members that maintain a Required Fund 

Deposit of less than $250,000, and 

approximately 88% of the deficiencies 

of those Members would have been 

eliminated during the Impact Study 

Period if the Required Fund Deposit 

were $250,000 or higher. By raising the 

minimum Required Fund Deposit 

amount to $250,000, the Commission 

believes the proposal could enable 

NSCC to decrease the number of 

backtesting deficiencies by Members, 

and thus decrease NSCC’s exposure to 

such Members in the event of a Member 

default. 

Additionally, based on the 

Commission’s review and analysis of 

the Impact Study Results, the proposed 

$250,000 minimum Required Fund 

Deposit amount would have decreased 

the number of repeat backtesting 

deficiencies during the study period, 

which would have decreased the 

number of Members whose margin 

levels during the study period fell below 

the 99% confidence target.68 Therefore, 

by raising the minimum Required Fund 

Deposit amount to $250,000, the 

Commission concludes that the increase 

in margin for NSCC Members that 

currently maintain a Required Fund 

Deposit of less than $250,000 would 

improve the probabilities that the 


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Federal Register / Vol. 86, No. 156 / Tuesday, August 17, 2021 / Notices 46047 

69See Alpine Letter, supra note 4, at 5–6. 

70 17 CFR 240.17Ad–22(e)(6)(iii). 71 15 U.S.C. 78s(b)(2). 

72 15 U.S.C. 78q–1(b)(3)(F). 

73 15 U.S.C. 78s(b)(2). 

74 15 U.S.C. 78q–1. 

75 15 U.S.C. 78s(b)(2). 

76 In approving the Proposed Rule Change, the 

Commission considered the proposals’ impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). See discussion supra Section III.B. 

77 17 CFR 200.30–3(a)(12). 

margin maintained by these Members is 

sufficient to cover NSCC’s potential 

future exposure to Members in the 

interval between the last margin 

collection and the close out of positions 

following a Member default. 

One commenter states the increase in 

margin is unwarranted because NSCC’s 

Clearing Fund backtesting results from 

the Impact Study Results show that 

NSCC’s current minimum Required 

Fund Deposit amount is sufficient to 

cover the risks presented by smaller 

Members.69 As summarized in Section 

II.B above, the Impact Study Results 

show that the proposed $250,000 

minimum requirement would have 

increased NSCC’s twelve-month rolling 

Clearing Fund coverage by 0.14% to 

99.41% resulting from decreased 

backtesting deficiencies, which the 

commenter argues does not warrant the 

proposed increase in the minimum 

Required Fund Deposit amount. 

However, as discussed above and based 

on the Commission’s review, the Impact 

Study Results show that certain 

Members who maintained Required 

Fund Deposits of less than $250,000 

experienced repeat backtesting 

deficiencies that resulted in those 

Members’ individual margin levels 

falling below the 99% confidence level. 

In other words, these Members’ 

individual margin levels were not 

sufficient 99% of the time during the 

study period. For that reason, the 

Commission is not persuaded by the 

commenter’s argument. 

Therefore, the Commission concludes 

NSCC’s Proposed Rule Change should 

better ensure NSCC maintains sufficient 

margin to cover its potential future 

exposure to its Members in the interval 

between the last margin collection and 

the close out of positions following a 

Member default, thereby reducing the 

likelihood NSCC or non-defaulting 

Members would incur losses as a result. 

Accordingly, the Commission finds that 

NSCC’s proposed increase to its 

minimum Required Fund Deposit 

would be consistent with Rule 17Ad– 

22(e)(6)(iii).70

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as modified by Partial 

Amendment No. 1, is consistent with 

the Exchange 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–2021–005 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549. 

All submissions should refer to File 

Number SR–NSCC–2021–005. 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 such 

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– 

2021–005 and should be submitted on 

or before September 7, 2021. 

V. Accelerated Approval of the 

Proposed Rule Change, as Modified by 

Partial Amendment No. 1 

The Commission finds good cause, 

pursuant to Section 19(b)(2) of the 

Exchange Act,71 to approve the 

proposed rule change prior to the 30th 

day after the date of publication of 

Partial Amendment No. 1 in the Federal 

Register. As discussed above, in Partial 

Amendment No. 1, NSCC updates its 

proposed rule text to include a legend 

to indicate a delayed implementation 

date, specifically that the rule change 

would be implemented no later than 20 

business days after Commission 

approval of the Proposed Rule Change. 

Partial Amendment No. 1 improves the 

efficiency of the filing process by 

obviating the need for NSCC to propose 

another change to its rules to resolve the 

omitted legend in the future, while not 

changing the purpose of or basis for the 

Proposed Rule Change. 

For similar reasons as discussed 

above, the Commission finds that Partial 

Amendment No. 1 is consistent with the 

requirement that NSCC’s rules be 

designed, in part, 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 under Section 17A(b)(3)(F) 

of the Exchange Act.72 Accordingly, the 

Commission finds good cause for 

approving the Proposed Rule Change, as 

modified by Partial Amendment No. 1, 

on an accelerated basis, pursuant to 

Section 19(b)(2) of the Exchange Act.73

VI. 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 74 and the rules 

and regulations promulgated 

thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act 75 that 

Proposed Rule Change SR–NSCC–2021– 

005, as modified by Partial Amendment 

No. 1, be, and hereby is, approved.76

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.77

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2021–17541 Filed 8–16–21; 8:45 am] 

BILLING CODE 8011–01–P 


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