Federal Register / Vol. 82, No. 176 / Wednesday, September 13, 2017 / Notices 43061 

15 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 81203 (July 

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

2017–010) (‘‘Notice’’). NSCC also filed a related 

advance notice with the Commission pursuant to 

Section 806(e)(1) of the Payment, Clearing, and 

Settlement Supervision Act of 2010 and Rule 19b– 

4(n)(1) under the Act. 15 U.S.C. 5465(e)(1) and 17 

CFR 240.19b–4(n)(1). The advance notice was 

published in the Federal Register on August 2, 

2017. Securities Exchange Act Release No. 81286 

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

(SR–NSCC–2017–804). The Commission did not 

receive any comments on that proposal. 

4Specific 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. 

5Notice, 82 at 35563–64. As 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. Notice, 82 at 35563. 

6Notice, 82 at 35563. As 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. 

7Notice, 82 at 35564. 

8 Id. 

9 Id. 

10 Id. 

11 Id. More 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 

family-issued 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. See Section I(B)(1) of Procedure XV of 

NSCC’s Rules, available at http://dtcc.com/∼/ 

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

12Notice, 82 at 35564. 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. Id. 

13 Id. 

14 Id. 

Internet Web site (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 Web site 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 the Exchange. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR– 

NYSEAMER–2017–11 and should be 

submitted on or before October 4, 2017. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.15

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2017–19376 Filed 9–12–17; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–81550; File No. SR–NSCC– 

2017–010] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Order Approving 

Proposed Rule Change 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’’) proposed 

rule change SR–NSCC–2017–010 

(‘‘Proposed Rule Change’’) pursuant to 

Section 19(b)(1) of the Securities 

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

19b–4 thereunder.2 The Proposed Rule 

Change was published for comment in 

the Federal Register on July 31, 2017.3

The Commission did not receive any 

comments on the Proposed Rule 

Change. For the reasons discussed 

below, the Commission approves the 

Proposed Rule Change. 

I. Description of the Proposed Rule 

Change 

The Proposed Rule Change is a 

proposal by NSCC to further address 

specific wrong-way risk 4 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’’).5 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.6 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.7 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.8 As 

described in detail below, NSCC 

proposes in the Proposed Rule Change 

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.9

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’’).10

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.11

NSCC applies this separate margin 

calculation to deal with specific wrongway 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.12 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.13 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.14

Although the risk of default by 

Members that are not on the Watch List 

is lower than Members on the Watch 


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43062 Federal Register / Vol. 82, No. 176 / Wednesday, September 13, 2017 / Notices 

15 Id. According to NSCC, it calibrated the FIS 

Charge rates based on historical corporate-issue 

recovery-rate 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. Securities Exchange Act 

Release No. 75768 (August 27, 2015), 80 FR 53219, 

53220 (September 2, 2015) (SR–NSCC–2015–003). 

16 15 U.S.C. 78s(b)(2)(C). 

17 15 U.S.C. 78q–1(b)(3)(F). 

18 17 CFR 240.17Ad–22(e)(4)(vi); (e)(6)(i); and 

(e)(6)(v). 19 15 U.S.C. 78q–1(b)(3)(F). 

20 Id. 

21 17 CFR 240.17Ad–22(e)(4)(i). 

22 Id. 

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 Proposed Rule Change 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 

List Members at a rate of no less than 

50 percent.15

II. Discussion and Commission 

Findings 

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

the Commission to approve a proposed 

rule change of a self-regulatory 

organization if it finds that such 

proposed rule change is consistent with 

the requirements of the Act and rules 

and regulations thereunder applicable to 

such organization.16 After carefully 

considering the Proposed Rule Change, 

the Commission finds that the Proposed 

Rule Change is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

NSCC. In particular, the Commission 

believes the proposal is consistent with 

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

well as Rules 17Ad–22(e)(4)(i) and 

17Ad–22(e)(6)(i) and (e)(6)(v) 

thereunder.18

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 be designed to promote 

the prompt and accurate clearance and 

settlement of securities transactions, 

and 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.19 The 

Commission believes that the Proposed 

Rule Change is consistent with the 

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

the Act for the reasons set forth below. 

The Commission believes that the 

proposal is designed to promote the 

prompt and accurate clearance and 

settlement of securities transactions. As 

described above, the proposal would 

provide for the collection by NSCC of 

margin amounts that contemplate and 

help address the specific wrong-way 

risk presented by all Members. In doing 

so, the proposal would help ensure that 

NSCC 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 to continue providing prompt and 

accurate clearance and settlement of 

securities transactions in the event of a 

Member default. 

The Commission believes also that the 

proposal is 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 above, the FIS Charge is 

calculated and collected to help mitigate 

NSCC’s loss exposure to specific wrongway 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 familyissued 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 assure the safeguarding of 

securities and funds which are in the 

custody or control of NSCC by 

mitigating the risk that NSCC would 

suffer a loss from a Member default, and 

reducing Members’ exposure to clearing 

fund losses from the specific wrong-way 

risk that NSCC faces from Member 

transactions in family-issued securities. 

Therefore, for the reasons stated above, 

the Commission believes that the 

Proposed Rule Change is consistent 

with the requirements of Section 

17A(b)(3)(F) of the Act.20

B. Consistency With Rule 17Ad– 

22(e)(4)(i) 

The Commission believes that the 

Proposed Rule Change is consistent 

with Rule 17Ad–22(e)(4)(i) under the 

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.21

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 

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 Act.22

C. Consistency With Rule 17Ad– 

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

The Commission believes that the 

Proposed Rule Change is consistent 

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

under the Act, which require, in part, 

that NSCC establish, implement, 


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Federal Register / Vol. 82, No. 176 / Wednesday, September 13, 2017 / Notices 43063 

23 17 CFR 240.17Ad–22(e)(6)(i) and (e)(6)(v). 

24 Id. 

25 15 U.S.C. 78q–1. 

26 In approving the Proposed Rule Change, the 

Commission considered the proposal’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

27 17 CFR 200.30–3(a)(12). 

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.23

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 Proposed Rule Change 

are consistent with Rule 17Ad– 

22(e)(6)(i) and (e)(6)(v) under the Act.24

III. Conclusion 

On the basis of the foregoing, the 

Commission finds that the Proposed 

Rule Change is consistent with the 

requirements of the Act, in particular 

the requirements of Section 17A of the 

Act 25 and the rules and regulations 

promulgated thereunder. 

It is therefore ordered, pursuant to 

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

proposed rule change SR–NSCC–2017– 

010 be and hereby is APPROVED as of 

the date of this order or the date of a 

notice by the Commission authorizing 

NSCC to implement its related advance 

notice proposal (SR–NSCC–2017–804), 

whichever is later.26

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.27

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2017–19379 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 38a–1, OMB Control No. 3235–0586, 

SEC File No. 270–522. 

Notice is hereby given that, pursuant 

to the Paperwork Reduction Act of 1995 

(44 U.S.C. 3501 et seq.), the Securities 

and Exchange Commission (the 

‘‘Commission’’) has submitted to the 

Office of Management and Budget a 

request for extension of the previously 

approved collection of information 

discussed below. 

Rule (17 CFR 270.38a–1) under the 

Investment Company Act of 1940 (15 

U.S.C. 80a) (‘‘Investment Company 

Act’’) is intended to protect investors by 

fostering better fund compliance with 

securities laws. The rule requires every 

registered investment company and 

business development company 

(‘‘fund’’) to: (i) Adopt and implement 

written policies and procedures 

reasonably designed to prevent 

violations of the federal securities laws 

by the fund, including procedures for 

oversight of compliance by each 

investment adviser, principal 

underwriter, administrator, and transfer 

agent of the fund; (ii) obtain the fund 

board of directors’ approval of those 

policies and procedures; (iii) annually 

review the adequacy of those policies 

and procedures and the policies and 

procedures of each investment adviser, 

principal underwriter, administrator, 

and transfer agent of the fund, and the 

effectiveness of their implementation; 

(iv) designate a chief compliance officer 

to administer the fund’s policies and 

procedures and prepare an annual 

report to the board that addresses 

certain specified items relating to the 

policies and procedures; and (v) 

maintain for five years the compliance 

policies and procedures and the chief 

compliance officer’s annual report to the 

board. 

The rule contains certain information 

collection requirements that are 

designed to ensure that funds establish 

and maintain comprehensive, written 

internal compliance programs. The 

information collections also assist the 

Commission’s examination staff in 

assessing the adequacy of funds’ 

compliance programs. 

While Rule 38a–1 requires each fund 

to maintain written policies and 

procedures, most funds are located 

within a fund complex. The experience 

of the Commission’s examination and 

oversight staff suggests that each fund in 

a complex is able to draw extensively 

from the fund complex’s ‘‘master’’ 

compliance program to assemble 

appropriate compliance policies and 

procedures. Many fund complexes 

already have written policies and 

procedures documenting their 

compliance programs. Further, a fund 

needing to develop or revise policies 

and procedures on one or more topics 

in order to achieve a comprehensive 

compliance program can draw on a 

number of outlines and model programs 

available from a variety of industry 

representatives, commentators, and 

organizations. 

There are approximately 4,133 funds 

subject to Rule 38a–1. Among these 

funds, 97 were newly registered in the 

past year. These 97 funds, therefore, 

were required to adopt and document 

the policies and procedures that make 

up their compliance programs. 

Commission staff estimates that the 

average annual hour burden for a fund 

to adopt and document these policies 

and procedures is 105 hours. Thus, we 

estimate that the aggregate annual 


sradovich on DSK3GMQ082PROD with NOTICES