43054 Federal Register / Vol. 82, No. 176 / Wednesday, September 13, 2017 / Notices 

1 12 U.S.C. 5465(e)(1). The Financial Stability 

Oversight Council designated NSCC a systemically 

important financial market utility on July 18, 2012. 

See Financial Stability Oversight Council 2012 

Annual Report, Appendix A, http://

www.treasury.gov/initiatives/fsoc/Documents/2012

%20Annual%20Report.pdf. Therefore, NSCC is 

required to comply with the Clearing Supervision 

Act and file advance notices with the Commission. 

See 12 U.S.C. 5465(e). 

2 17 CFR 240.19b–4(n)(1)(i). 

3 15 U.S.C. 78s(b)(1). 

4Securities Exchange Act Release No. 81286 

(August 2, 2017), 82 FR 37141 (August 8, 2017) 

(SR–NSCC–2017–804) (‘‘Notice’’). NSCC also filed a 

related proposed rule change with the Commission 

pursuant to Section 19(b)(1) of the Exchange Act 

and Rule 19b–4 thereunder, seeking approval of 

changes to its rules necessary to implement the 

Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 

240.19b–4, respectively. The proposed rule change 

was published in the Federal Register on July 31, 

2017. Securities Exchange Act Release No. 81203 

(July 25, 2017), 82 FR 35563 (July 31, 2017) (SR– 

NSCC–2017–010). The Commission did not receive 

any comments on that proposal. 

5Specific wrong-way risk is the risk that an 

exposure to a counterparty is highly likely to 

increase when the creditworthiness of that 

counterparty is deteriorating. See Principles for 

financial market infrastructures, issued by the 

Committee on Payment and Settlement Systems and 

the Technical Committee of the International 

Organization of Securities Commissions 47 n.65 

(April 2012), available at http://www.bis.org/publ/ 

cpss101a.pdf. 

6As part of this proposal, NSCC proposes to 

define in its rules that, for a given Member, a 

family-issued security is a security that was issued 

by such Member or an affiliate of such Member. 

7As part of its ongoing monitoring of its 

membership, NSCC utilizes an internal credit risk 

rating matrix to rate its risk exposures to its 

Members based on a scale from 1 (the strongest) to 

7 (the weakest). Members that fall within the 

weakest three rating categories (i.e., 5, 6, and 7) are 

placed on NSCC’s ‘‘Watch List’’ and, as provided 

under NSCC’s Rules and Procedures (‘‘Rules’’), may 

be subject to enhanced surveillance or additional 

margin charges. See Section 4 of Rule 2B and 

Section I(B)(1) of Procedure XV of NSCC’s Rules, 

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

Downloads/legal/rules/nscc_rules.pdf. 

8More specifically, fixed-income securities that 

are family-issued securities are charged a rate of no 

less than 80 percent for firms that are rated 6 or 7 

on the credit risk rating matrix, and no less than 

40 percent for firms that are rated 5 on the credit 

risk rating matrix. Equity securities that are familyissued securities are charged a rate of 100 percent 

for firms that are rated 6 or 7 on the credit risk 

rating matrix, and no less than 50 percent for firms 

that are rated 5 on the credit risk rating matrix. 

9 In a default scenario, NSCC would receive the 

family-issued securities from a Member’s 

guaranteed long transactions and would have to 

liquidate the holding to unwind NSCC’s position. 

Additional Information or Comments: 

Copies of the forms and supporting 

documents can be obtained from Dana 

Hickman at (312) 751–4981 or 

Dana.Hickman@RRB.GOV. 

Comments regarding the information 

collection should be addressed to Brian 

Foster, Railroad Retirement Board, 844 

North Rush Street, Chicago, Illinois, 

60611–1275 or Brian.Foster@rrb.gov and 

to the OMB Desk Officer for the RRB, 

Fax: 202–395–6974, Email address: 

OIRA_Submission@omb.eop.gov. 

Brian D. Foster, 

Clearance Officer. 

[FR Doc. 2017–19442 Filed 9–12–17; 8:45 am] 

BILLING CODE 7905–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–81545; File No. SR–NSCC– 

2017–804] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of No Objection to 

an Advance Notice To Expand the 

Application of the Family-Issued 

Securities Charge 

September 7, 2017. 

On July 10, 2017, National Securities 

Clearing Corporation (‘‘NSCC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) advance 

notice SR–NSCC–2017–804 (‘‘Advance 

Notice’’) 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’’) 1 and Rule 

19b–4(n)(1)(i) 2 under the Securities 

Exchange Act of 1934 (‘‘Exchange 

Act’’).3 The Advance Notice was 

published for comment in the Federal 

Register on August 8, 2017.4 The 

Commission did not receive any 

comments on the Advance Notice. This 

publication serves as notice that the 

Commission does not object to the 

changes set forth in the Advance Notice. 

I. Description of the Advance Notice 

The Advance Notice is a proposal by 

NSCC to further address specific wrongway risk 5 that is present when NSCC 

acts as central counterparty to a 

transaction with an NSCC member 

(‘‘Member’’) where the underlying 

securities are securities issued by such 

Member or an affiliate of such Member 

(‘‘family-issued securities’’).6 Currently, 

NSCC applies a targeted margin charge 

to address the specific wrong-way risk 

of family-issued securities transactions 

(‘‘FIS Charge’’) where the Member is on 

NSCC’s Watch List.7 NSCC believes that 

Members on the Watch List present a 

higher credit risk (i.e., a greater risk of 

defaulting on their settlement 

obligations), compared to Members not 

on the Watch List. As such, the familyissued securities of Members on the 

Watch List currently receive a FIS 

Charge because of the increased credit 

risk presented by such Members. As 

described in detail below, NSCC 

proposes in the Advance Notice to 

expand the application of the FIS 

Charge to all Members, regardless of a 

Member’s Watch List status, but still 

maintain a higher FIS Charge for 

Members that present a greater credit 

risk to NSCC, such as Members on the 

Watch List. 

Currently, in calculating a Watch List 

Member’s overall margin charge (i.e., a 

Watch List Member’s required deposit 

to NSCC’s clearing fund), NSCC 

excludes the Member’s net, unsettled 

long position in family-issued securities 

from the volatility component of the 

margin calculation (‘‘VaR Charge’’). 

Instead, for such unsettled long 

positions, NSCC calculates the required 

margin (i.e., the FIS Charge) by 

multiplying the position value by a set 

percentage, which is determined based 

on a Member’s rating on NSCC’s 

internal credit risk rating matrix.8 NSCC 

applies this separate margin calculation 

to deal with specific wrong-way risk 

that arises from these positions because 

NSCC has to liquidate the unsettled 

family-issued security long positions in 

the Member’s portfolio to manage the 

default.9 Given that the Member’s 

default would likely adversely affect 

NSCC’s ability to liquidate such 

positions at full value (because the 

value of the family-issued securities will 

decline in response to the Member’s 

default), NSCC applies the FIS Charge to 

try to address the risk of a shortfall. 

According to NSCC, the FIS Charge 

constitutes a more conservative 

approach to collecting margin on 

family-issued security positions than 

what may be achieved by applying the 

VaR Charge, which does not recognize 

the relationship between the Member 

and the family-issued securities. 

Although the risk of default by 

Members that are not on the Watch List 

is lower than Members on the Watch 

List, NSCC believes that it is appropriate 

to apply the FIS Charge to all Members 

because all Members’ long positions in 

family-issued securities present specific 

wrong-way risk. However, the proposal 

would still maintain the relation 

between the FIS Charge and the 

Member’s risk of default (i.e., the 

Member’s credit risk), while at the same 

time addressing the difference in risk 

posed by equity and fixed-income 

securities. As such, NSCC proposes in 

the Advance Notice to apply the FIS 

Charge to fixed-income securities that 

are family-issued securities of nonWatch List Members at a rate of no less 

than 40 percent, and to equities that are 

family-issued securities of non-Watch 


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Federal Register / Vol. 82, No. 176 / Wednesday, September 13, 2017 / Notices 43055 

10According to NSCC, it calibrated the FIS Charge 

rates based on historical corporate-issue recoveryrate data. The rate applicable to equities is higher 

than the rate applicable to fixed-income securities 

because NSCC determined that equities present a 

greater risk than fixed-income securities of having 

a value at or near zero when a Member defaults. 

The Commission understands that NSCC calculated 

the 40 and 50 percent rates based on a weighted 

value of the probability of a Member defaulting and 

the potential loss that NSCC may realize when 

liquidating family-issued securities after a Member 

default. 

11See 12 U.S.C. 5461(b). 

12 12 U.S.C. 5464(a)(2). 

13 12 U.S.C. 5464(b). 

14 12 U.S.C. 5464(a)(2). 

15 15 U.S.C. 78q–1. 

16 17 CFR 240.17Ad–22. 

17 12 U.S.C. 5464(b). 

18 17 CFR 240.17Ad–22. 

19 12 U.S.C. 5464(b). 

20 17 CFR 240.17Ad–22(e)(4)(i). 

21 17 CFR 240.17Ad–22(e)(6)(i) and (v). 

22 Id. 

23 17 CFR 240.17Ad–22(e)(4)(i). 

List Members at a rate of no less than 

50 percent.10

II. Discussion and Commission 

Findings 

Although the Clearing Supervision 

Act does not specify a standard of 

review for an advance notice, its stated 

purpose is instructive: To mitigate 

systemic risk in the financial system 

and promote financial stability by, 

among other things, promoting uniform 

risk management standards for 

systemically important financial market 

utilities and strengthening the liquidity 

of systemically important financial 

market utilities.11 Section 805(a)(2) of 

the Clearing Supervision Act 12

authorizes the Commission to prescribe 

risk management standards for the 

payment, clearing, and settlement 

activities of designated clearing entities 

engaged in designated activities for 

which the Commission is the 

supervisory agency. Section 805(b) of 

the Clearing Supervision Act 13 provides 

the following objectives and principles 

for the Commission’s risk management 

standards prescribed under Section 

805(a): 

• Promote robust risk management; 

• promote safety and soundness; 

• reduce systemic risks; and 

• support the stability of the broader 

financial system. 

The Commission has adopted risk 

management standards under Section 

805(a)(2) of the Clearing Supervision 

Act 14 and Section 17A of the Exchange 

Act (‘‘Rule 17Ad–22’’).15 Rule 17Ad–22 

requires registered clearing agencies to 

establish, implement, maintain, and 

enforce written policies and procedures 

that are reasonably designed to meet 

certain minimum requirements for their 

operations and risk management 

practices on an ongoing basis.16

Therefore, it is appropriate for the 

Commission to review proposed 

changes in advance notices against the 

objectives and principles of these risk 

management standards as described in 

Section 805(b) of the Clearing 

Supervision Act 17 and against Rule 

17Ad–22.18

The Commission believes the 

proposal in the Advance Notice is 

consistent with the objectives and 

principles described in Section 805(b) of 

the Act,19 and Rule 17Ad–22, in 

particular Rule 17Ad–22(e)(4)(i) 20 and 

Rule 17Ad–22(e)(6)(i) and (v) 21 under 

the Exchange Act, as described in detail 

below. 

A. Consistency With Section 805(b) of 

the Clearing Supervision Act 

As discussed below, the Commission 

believes that the changes proposed in 

the Advance Notice are consistent with 

Section 805(b) of the Clearing 

Supervision Act because they: (i) Are 

designed to reduce systemic risk; (ii) are 

designed to support the stability of the 

financial system; (iii) are designed to 

promote robust risk management; and 

(iv) are consistent with promoting safety 

and soundness. 

The Commission believes that the 

proposal is designed to help promote 

robust risk management. As described 

above, the FIS Charge is calculated and 

collected to help mitigate NSCC’s loss 

exposure to specific wrong-way risk that 

NSCC may face when liquidating 

family-issued security positions that are 

depreciating in value in response to a 

Member’s default. By expanding the FIS 

Charge to family-issued security 

transactions presented to NSCC by all 

Members, the proposal would assist 

NSCC in collecting margin and 

maintaining a clearing fund amount that 

more accurately reflects NSCC’s overall 

risk exposure to its Members. Therefore, 

the proposal is designed to help better 

promote robust risk management at 

NSCC by reducing NSCC’s loss exposure 

to the specific wrong-way risk that 

NSCC faces from Member transactions 

in family-issued securities. 

The Commission also believes that the 

proposal is designed to promote safety 

and soundness, as well as support the 

stability of the financial system, and 

reduce systemic risk. By providing for 

the collection by NSCC of margin 

amounts that contemplate and help 

address the specific wrong-way risk 

presented by all Members, the proposal 

would assist NSCC in helping to ensure 

that it maintains sufficient margin in the 

event that a Member holding familyissued securities defaults and such 

positions significantly decrease in 

value. Without this increased margin, 

NSCC is at a greater risk of not having 

enough margin to offset potential losses 

from the reduced value of family-issued 

securities in a default scenario. Such 

losses could threaten NSCC’s ability to 

continue operations of its critical 

clearance and settlement services. 

Because the proposal would generally 

increase the level of financial resources 

available to NSCC, better enabling NSCC 

to continue operating in default 

scenarios, the proposal would help 

NSCC operate more safely and soundly 

and reduce the systemic risk associated 

with NSCC not providing critical 

clearance and settlement services in the 

event of a Member default. Therefore, 

the Commission believes that the 

changes proposed in the Advance 

Notice are consistent with Section 

805(b) of the Clearing Supervision 

Act.22

B. Consistency With Rule 17Ad– 

22(e)(4)(i) 

The Commission believes that the 

changes proposed in the Advance 

Notice are consistent with Rule 17Ad– 

22(e)(4)(i) under the Exchange Act, 

which 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.23

As described above, NSCC is exposed 

to specific wrong-way risk where it acts 

as central counterparty for its Members 

for transactions in family-issued 

securities. The expanded application of 

the FIS Charge to all Members would 

help further mitigate NSCC’s loss 

exposure to this risk. The charge is 

calculated and imposed based on the 

value and type of family-issued 

securities in each Member’s portfolio 

and in consideration of the Members’ 

credit rating, as calculated by NSCC’s 

internal credit risk matrix. Although the 

FIS Charge may not fully reflect the 

recovery rate on a family-issue security 

when a Member defaults, the 

Commission understands that 

expanding the FIS Charge to non-Watch 

List Members, as proposed, would 

enable NSCC to collect more margin on 

such positions than would a VaR 

Charge, more accurately reflecting the 

risks those positions present. Thus, the 


sradovich on DSK3GMQ082PROD with NOTICES
43056 Federal Register / Vol. 82, No. 176 / Wednesday, September 13, 2017 / Notices 

24 Id. 

25 17 CFR 240.17Ad–22(e)(6)(i) and (v). 

26 Id. 

27 12 U.S.C. 5465(e)(1)(I). 

expanded FIS Charge is designed to 

help NSCC collect sufficient financial 

resources to help cover the specific risk 

exposure, with a high degree of 

confidence, which is presented by all 

Members seeking to clear and settle 

transactions in family-issued securities. 

Therefore, the Commission believes that 

the proposal to expand the FIS Charge 

to all Members is consistent with Rule 

17Ad–22(e)(4)(i) under the Exchange 

Act.24

C. Consistency With Rule 17Ad– 

22(e)(6)(i) and (v) 

The Commission believes that the 

changes proposed in the Advance 

Notice are consistent with Rule 17Ad– 

22(e)(6)(i) and (v) under the Exchange 

Act, which require, 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; and uses an appropriate method 

for measuring credit exposure that 

accounts for relevant product risk 

factors and portfolio effects across 

products.25

As described above, NSCC faces 

specific wrong-way risk where it acts as 

central counterparty to Member 

transactions in family-issued securities. 

To help address this risk, NSCC applies 

the FIS Charge in calculating the 

Member’s required margin. Specifically, 

the FIS Charge is a component of the 

margin that NSCC calculates and 

collects using a risk-based margin 

methodology that is designed to help 

maintain the coverage of NSCC’s credit 

exposures to its Members at a 

confidence level of at least 99 percent. 

The FIS Charge is tailored to consider 

both the value and type of family-issued 

securities held by the Member, as well 

as the credit risk presented by the 

Member, as calculated by NSCC. 

However, currently, the FIS Charge is 

assessed only against Members on the 

Watch List because of the additional 

credit risk presented by such Members. 

Nevertheless, all Members, not just 

Members on the Watch List, present 

specific wrong-way risk. As such, NSCC 

proposes to expand the FIS Charge to all 

Members, while maintaining the 

relation between the FIS Charge and the 

Member’s credit risk. Specifically, 

NSCC proposes to apply the FIS Charge 

to fixed-income securities that are 

family-issued securities of non-Watch 

List Members at a rate of no less than 

40 percent, and to equities that are 

family-issued securities of non-Watch 

List Members at a rate of no less than 

50 percent. Although NSCC proposes to 

apply a lesser percentage rate to nonWatch List Members than some Watch 

List Members, the proposed rate is 

designed to more accurately reflect the 

risks posed than what is reflected in a 

VaR Charge. 

Because the expanded FIS Charge also 

would be a tailored component of the 

margin that NSCC collects from nonWatch List Members to help cover 

NSCC credit exposure to such Members, 

as the charge would be based on 

different product risk factors with 

respect to equity and fixed-income 

securities, as described above, the 

Commission believes that the proposed 

changes in the Advance Notice are 

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

and (v) under the Exchange Act.26

III. Conclusion 

It is therefore noticed, pursuant to 

Section 806(e)(1)(I) of the Clearing 

Supervision Act,27 that the Commission 

does not object to Advance Notice (SR– 

NSCC–2017–804) and that NSCC is 

authorized to implement the proposed 

change as of the date of this notice or 

the date of an order by the Commission 

approving the proposed rule change 

(SR–NSCC–2017–010) that reflects rule 

changes that are consistent with this 

Advance Notice, whichever is later. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2017–19375 Filed 9–12–17; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

Submission for OMB Review; 

Comment Request 

Upon Written Request, Copies Available 

From: Securities and Exchange 

Commission, Office of FOIA Services, 

100 F Street NE., Washington, DC 

20549–2736. 

Extension: Rule 10b–17, SEC File No. 270– 

427, OMB Control No. 3235–0476. 

Notice is hereby given that pursuant 

to the Paperwork Reduction Act of 1995 

(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the 

Securities and Exchange Commission 

(‘‘Commission’’) has submitted to the 

Office of Management and Budget 

(‘‘OMB’’) a request for approval of 

extension of the previously approved 

collection of information provided for in 

Rule 10b–17 (17 CFR 240.10b–17), 

under the Securities Exchange Act of 

1934 (15 U.S.C 78a et seq.). 

Rule 10b–17 requires any issuer of a 

class of securities publicly traded by the 

use of any means or instrumentality of 

interstate commerce or of the mails or 

of any facility of any national securities 

exchange to give notice of the following 

specific distributions relating to such 

class of securities: (1) A dividend or 

other distribution in cash or in kind 

other than interest payments on debt 

securities; (2) a stock split or reverse 

stock split; or (3) a rights or other 

subscription offering. Notice shall be 

either given to the Financial Industry 

Regulatory Authority, Inc. as successor 

to the National Association of Securities 

Dealers, Inc. or in accordance with the 

procedures of the national securities 

exchange upon which the securities are 

registered. The Commission may 

exempt an issuer of over-the-counter 

(but not listed) securities from the 

notice requirement. The requirements of 

10b–17 do not apply to redeemable 

securities of registered open-end 

investment companies or unit 

investment trusts. 

The information required by Rule 

10b–17 is necessary for the execution of 

the Commission’s mandate under the 

Securities Exchange Act of 1934 to 

prevent fraudulent, manipulative, and 

deceptive acts and practices. The 

Commission has found that not 

requiring formal notices of the types of 

distributions covered by Rule 10b–17 

has led to a number of abuses including 

purchasers not being aware of their 

rights to such distributions. It is only 

through formal notice of the 

distribution, including the date of the 

distribution, that current holders, 

potential buyers, or potential sellers of 

the securities at issue will know their 

rights to the distribution. Therefore, it is 

only through formal notice that 

investors can make an informed 

decision as to whether to buy or sell a 

security. 

There are approximately 12,127 

respondents per year. These 

respondents make approximately 27,144 

responses per year. Each response takes 

approximately 10 minutes to complete. 

Thus, the total compliance burden per 

year is 4,524 burden hours. The total 

internal labor cost of compliance for the 

respondents, associated with producing 

and filing the reports, is approximately 

$317,991.96. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 


sradovich on DSK3GMQ082PROD with NOTICES