Document ID: SEC-2020-0239-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2020-02-20T05:00Z

[Federal Register Volume 85, Number 34 (Thursday, February 20, 2020)]
[Notices]
[Pages 9843-9847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03317]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88191; File No. SR-NSCC-2019-004]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change To Enhance National 
Securities Clearing Corporation's Haircut-Based Volatility Charge 
Applicable to Municipal Bonds

February 13, 2020.
    On December 13, 2019, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
proposed rule change SR-NSCC-2019-004 to revise NSCC's methodology for 
calculating margin amounts applicable to municipal bonds.\3\ The 
proposed rule change was published for comment in the Federal Register 
on January 2, 2020,\4\ and the Commission received no comment letters 
regarding the changes proposed in the proposed rule change.\5\ For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NSCC also filed the proposals contained in the proposed rule 
change as advance notice SR-NSCC-2019-801 with the Commission 
pursuant to Section 806(e)(1) 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). Notice of Filing of the Advance Notice was 
published for comment in the Federal Register on January 14, 2020. 
Securities Exchange Act Release No. 87911 (January 8, 2020), 85 FR 
2197 (January 14, 2020) (File No. SR-NSCC-2019-801).
    \4\ Securities Exchange Act Release No. 87858 (December 26, 
2019), 85 FR 149 (January 2, 2020) (``Notice of Filing'').
    \5\ As the proposals contained in the proposed rule change were 
also filed as an advance notice, all public comments received on the 
proposals are considered regardless of whether the comments are 
submitted on the proposed rule change or the advance notice.
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I. Description of the Proposed Rule Change

    The proposed rule change would revise NSCC's Rules and Procedures 
(``Rules'') \6\ to change the methodology NSCC uses for calculating the 
haircut-based margin charge applicable to municipal bonds.
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    \6\ Capitalized terms not defined herein are defined in NSCC's 
Rules, available at http://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
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A. Background

    NSCC provides clearing, settlement, risk management, central 
counterparty services, and a guarantee of completion for virtually all 
broker-to-broker trades involving equity securities, corporate and 
municipal debt securities, and certain other securities. NSCC manages 
its credit exposure to its members by determining an appropriate 
Required Fund Deposit (i.e., margin) for each member.\7\ NSCC collects 
each member's Required Fund Deposit to mitigate potential losses to 
NSCC associated with the liquidation of the member's portfolio in the 
event of the member's default.\8\ The aggregate of all NSCC members' 
Required Fund Deposits (together with certain other deposits required 
under the Rules) constitutes NSCC's Clearing Fund, which NSCC would 
access should a defaulting member's own Required Fund Deposit be 
insufficient to satisfy losses to NSCC caused by the liquidation of the 
defaulting member's portfolio.\9\
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    \7\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters) of the Rules (``Procedure XV''), supra 
note 6.
    \8\ The Rules identify when NSCC may cease to act for a member 
and the types of actions NSCC may take. For example, NSCC may 
suspend a firm's membership with NSCC or prohibit or limit a 
member's access to NSCC's services in the event that member defaults 
on a financial or other obligation to NSCC. See Rule 46 
(Restrictions on Access to Services), supra note 6.
    \9\ See id.
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    Each member's Required Fund Deposit consists of a number of 
applicable components, which are calculated to address specific risks 
that the member's portfolio presents to NSCC.\10\ Generally, the 
largest component of a member's Required Fund Deposit is the volatility 
component.\11\ The volatility component is designed to calculate the 
potential losses on a portfolio over a given period of time assumed 
necessary to liquidate the portfolio, within a 99% confidence level.
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    \10\ Procedure XV, supra note 6.
    \11\ See id.
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    The methodology for calculating the volatility component of the 
Required Fund Deposit depends on the type of security.\12\ 
Specifically, for certain securities, including municipal bonds, NSCC 
calculates a haircut-based volatility component by multiplying the 
absolute value of a member's positions in such securities by a certain 
percentage designated by NSCC.\13\
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    \12\ For most securities (e.g., equity securities), NSCC 
calculates the volatility component as the greater of (1) the larger 
of two separate calculations that utilize a parametric Value at Risk 
(``VaR'') model, (2) a gap risk measure calculation based on the 
largest non-index position in a portfolio that exceeds a 
concentration threshold, which addresses concentration risk that can 
be present in a member's portfolio, and (3) a portfolio margin floor 
calculation based on the market values of the long and short 
positions in the portfolio, which addresses risks that might not be 
adequately addressed with the other volatility component 
calculations. See id.; see also Securities Exchange Act Release No. 
82780 (February 26, 2018), 83 FR 9035 (March 2, 2018) (File No. SR-
NSCC-2017-808); Securities Exchange Act Release No. 82781 (February 
26, 2018), 83 FR 9042 (March 2, 2018) (File No. SR-NSCC-2017-020).
    \13\ Procedure XV, supra note 6.
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    NSCC's current methodology for designating the percentages used in 
calculating the haircut-based volatility component for municipal bonds 
involves distinguishing between municipal bonds based on tenor (i.e., 
remaining time to maturity), municipal sector (e.g., general 
obligation, transportation, healthcare, etc.), and credit rating.\14\ 
Pursuant to that methodology, NSCC assigns each tenor-based group a 
percentage.\15\ For municipal bonds rated higher than BBB+, the tenor-
based percentage is the percentage NSCC uses to calculate the haircut-
based volatility component.\16\ However, for municipal bonds rated BBB+ 
or lower, NSCC multiplies the tenor-based percentage by a sector-based 
risk factor, resulting in a larger percentage for the haircut.\17\ The 
additional sector-based risk factors

[[Page 9844]]

account for the variable risks between municipal sectors associated 
with the various industries in which the bonds are issued and the 
sources of bond repayment.\18\
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    \14\ Id.
    \15\ Id.
    \16\ Id. For example, a $10MM short position in a municipal bond 
rated above BBB+ with 3 years to maturity is subject to the 2-5 
years tenor-based group haircut of 5%, which applies to the absolute 
market value of the positions, resulting in a haircut-based 
volatility component of $500,000. Notice of Filing, supra note 4 at 
150.
    \17\ Procedure XV, supra note 6. For example, a $10MM short 
position in a healthcare sector municipal bond rated BBB+ or lower 
with 3 years to maturity is subject to the 2-5 years tenor-based 
group haircut (5%) multiplied by the sector-based factor of 1.2, 
resulting in a 6% haircut-based volatility component of $600,000. 
Notice of Filing, supra note 4 at 151.
    \18\ Notice of Filing, supra note 4 at 151.
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    In all cases, the percentage used to calculate the municipal bond 
haircut-based volatility component is not less than 2%, regardless of a 
municipal bond's credit rating.\19\
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    \19\ Procedure XV, supra note 6.
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B. Changes to NSCC's Methodology for Calculating Municipal Bond Haircut 
Percentages

    NSCC states that it regularly assesses its margining methodologies 
to evaluate whether margin levels are commensurate with the particular 
risk attributes of the various products, portfolios, and markets that 
NSCC serves.\20\ NSCC further states that based on recent impact 
studies, the margin levels generated from municipal bonds using the 
current methodology exceed the levels necessary to mitigate the risk 
associated with those securities.\21\ In the proposed rule change, NSCC 
seeks to change the methodology for calculating the municipal bond 
haircut-based volatility component so that the amount of margin NSCC 
collects is more commensurate with the risk attributes of those 
securities.
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    \20\ Notice of Filing, supra note 4 at 151.
    \21\ Notice of Filing, supra note 4 at 151-52. As part of the 
proposed rule change, NSCC filed Exhibit 3--NSCC Impact Studies, 
comparing the current and proposed methodologies. Pursuant to 17 CFR 
240.24b-2, NSCC requested confidential treatment of Exhibit 3.
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    As proposed, NSCC would retain the current provision that in all 
cases the percentage used to calculate the municipal bond haircut-based 
volatility component is not less than 2%, regardless of a municipal 
bond's credit rating. NSCC would also continue to distinguish between 
municipal bonds based on tenor, credit rating, and municipal sector. 
However, NSCC would calculate the haircut percentages for various 
groups of municipal bonds based on the historical returns of one or 
more benchmark indices over a look-back period not shorter than 10 
years, using a minimum 99% calibration percentile.
    The proposal would change the manner in which NSCC addresses the 
risk presented by lower-rated municipal bonds. Instead of the current 
methodology's approach which applies a sector-based straight risk 
factor to the tenor-based haircut resulting in a larger haircut 
percentage, the proposed approach would allow the calculation to be 
more precisely tailored to the risks presented by particular municipal 
bonds. Specifically, the new approach would base the haircut percentage 
on the historical returns of one or more benchmark indices, such as 
tenor-based indices, municipal bond sector-based indices, and high-
yield indices, over a look-back period of at least ten years, and would 
no longer use a sector-based straight risk factor for lower-rated 
municipal bonds. This approach should allow NSCC to more accurately 
calculate margin amounts appropriate for the risks presented by such 
municipal bonds by allowing NSCC to take into account a broader range 
of risk characteristics associated with municipal bonds. NSCC notes 
that, based on recent impact studies comparing the current and proposed 
methodologies, the proposed methodology would manage NSCC's applicable 
risks well above the 99% confidence level, although it would generate 
lower overall margin amounts.\22\
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    \22\ Id.
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    NSCC states that for municipal bonds rated higher than BBB+, NSCC 
would use the percentage derived from a tenor-based index as the 
haircut for the purpose of calculating the volatility component.\23\ 
For municipal bonds rated BBB+ or lower (or not rated), NSCC states 
that it would use a percentage that is the highest of: (1) The 
applicable tenor-based index, (2) municipal bond sector-based indices, 
and (3) a high-yield index.\24\ For all municipal bonds, when deriving 
the haircut percentage from the applicable indices, NSCC would use a 
look-back period of a 10-year rolling window plus a 1-year ``worst case 
scenario'' stress period.\25\ NSCC would identify the largest 3-day 
price return movement (reflected as a percentage) within the 99th 
percentile of all 3-day price return movements during the look-back 
period. Additionally, NSCC proposes to re-calibrate the municipal bond 
haircut percentages no less frequently than annually.
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    \23\ Notice of Filing, supra note 4 at 151.
    \24\ Id.
    \25\ NSCC believes that a 10-year window plus 1-year stress 
period would capture relevant data and cover sufficient market data 
without diluting the ``tail'' with an abundance of data. NSCC 
believes this look-back period is typically long enough to capture 
at least two recent market cycles, whereas a longer look-back period 
might ``flatten'' out the results because recent volatile periods 
might be offset by non-volatile periods, making the more recent 
volatility appear less significant. Notice of Filing, supra note 4 
at 152.
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    As proposed, NSCC would have the ability to modify certain aspects 
of the application of the proposed methodology consistent with NSCC's 
relevant governance procedures and based on NSCC's determination that 
such modifications are necessary to manage the applicable risks above 
the 99% confidence level. Specifically, based on NSCC's regular review 
of its margin methodologies, NSCC would be able to modify: The 
frequency of re-calibrating the municipal bond haircut percentages; 
which benchmark indices to use; the applicable period for the price 
return used in the calculations; and the look-back period. NSCC states 
that any such modifications would be subject to the governance 
procedures applicable to all of NSCC's margin methodologies, as set 
forth in NSCC's Clearing Agency Model Risk Management Framework, which 
the Commission has approved.\26\
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    \26\ Notice of Filing, supra note 4 at 151-52; See also 
Securities Exchange Act Release No. 81485 (August 25, 2017), 82 FR 
41433 (August 31, 2017) (File No. SR-NSCC-2017-008); Securities 
Exchange Act Release No. 84458 (October 19, 2018), 83 FR 53925 
(October 25, 2018) (File No. SR-NSCC-2018-009).
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    Finally, NSCC proposes a method to address extraordinary 
circumstances in which a certain municipality or issuer may present 
unique risks not otherwise captured by the proposed methodology's use 
of a percentage derived from the maximum of the applicable tenor-based 
index, municipal bond sector-based indices, and high-yield indices.\27\ 
In such scenarios, NSCC proposes to have the ability to use the highest 
percentage generated for any municipal bond group when calculating the 
haircut-based volatility component for municipal bonds issued by the 
municipality or issuer presenting such unique risks.
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    \27\ For example, the market price risk for issues of a 
municipality facing technical default following a natural disaster 
may not be fully captured by the proposed methodology due to the 
liquidity profile of municipal securities.
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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \28\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the proposed rule 
change, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to NSCC. In particular, the 
Commission finds that the proposed rule change is consistent with 
Section

[[Page 9845]]

17A(b)(3)(F) \29\ of the Act and Rules 17Ad-22(e)(4) and (e)(6) 
thereunder.\30\
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    \28\ 15 U.S.C. 78s(b)(2)(C).
    \29\ 15 U.S.C. 78q-1(b)(3)(F).
    \30\ 17 CFR 240.17Ad-22(e)(4) and (e)(6).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency, such as NSCC, be designed to promote the prompt 
and accurate clearance and settlement of securities transactions and 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.\31\
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    \31\ 15 U.S.C. 78q-1(b)(3)(F).
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    First, as described above in Section I.A., NSCC's current 
methodology calculates municipal bond haircut percentages using tenor-
based percentages and sector-based risk factors. NSCC states that the 
current methodology generates margin amounts greater than necessary to 
mitigate NSCC's risks associated with municipal bonds.\32\ NSCC 
proposes to replace the current methodology with one that would 
calculate the haircut percentages based on the historical returns of 
one or more benchmark indices over a look-back period of not shorter 
than 10 years, using a minimum 99% calibration percentile. These 
changes would result in margin amounts that are more commensurate with 
the risk attributes of municipal bonds. As noted above, while the 
proposed methodology would reduce margin requirements for members 
holding positions in municipal bonds, NSCC states that based on recent 
impact studies, the proposed methodology would fully manage NSCC's 
applicable risks well above the 99% confidence level.\33\ NSCC's 
collection of margin amounts with respect to municipal bonds in a 
manner that fully manages NSCC's applicable credit exposures should 
help ensure that, in the event of a member default, NSCC's operations 
would not be disrupted and non-defaulting members would not be exposed 
to losses that they cannot anticipate or control. Accordingly, the 
Commission finds that NSCC's proposed methodology for calculating 
municipal bond haircut percentages would promote the prompt and 
accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Act.\34\ Moreover, NSCC's 
collection of margin amounts with respect to municipal bonds in a 
manner that fully manages NSCC's applicable credit exposures would help 
ensure that NSCC maintains adequate funds necessary to manage the risks 
associated with performing its clearance and settlement functions, 
which could, in turn, help reduce the amount of credit losses that 
would potentially be charged to the Clearing Fund contributions of non-
defaulting members in the event of a default. Accordingly, the 
Commission finds that NSCC's proposed methodology for calculating 
municipal bond haircut percentages should safeguard the securities and 
funds that are in NSCC's custody or control or for which NSCC is 
responsible, consistent with Section 17A(b)(3)(F).\35\
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    \32\ Notice of Filing, supra note 4 at 151-52.
    \33\ Notice of Filing, supra note 4 at 151-52, 154.
    \34\ 15 U.S.C. 78q-1(b)(3)(F).
    \35\ Id.
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    Second, as described above in Section I.B., NSCC proposes to re-
calibrate the municipal bond haircut percentages no less frequently 
than annually. Regular re-calibration of the municipal bond haircut 
percentages is necessary to ensure that the relevant calculations and 
resulting margin levels take into account any changes over time to the 
risk attributes of municipal bonds. The proposal to re-calibrate the 
municipal bond haircut percentages no less frequently than annually 
would require NSCC to regularly review the municipal bond haircut 
percentages, thus helping to ensure that NSCC collects margin amounts 
commensurate with the particular risk attributes of municipal bonds. By 
enabling NSCC to continue to collect margin amounts sufficient to 
manage the risks associated with municipal bonds, NSCC's proposal to 
re-calibrate the municipal bond haircut percentages no less frequently 
than annually should help limit NSCC's applicable credit exposures such 
that, in the event of a default of a member with positions in municipal 
bonds, NSCC's operations would not be disrupted and non-defaulting 
members would not be exposed to losses that they cannot anticipate or 
control. Accordingly, the Commission believes that NSCC's proposal to 
re-calibrate the municipal bond haircut percentages no less frequently 
than annually would promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F).\36\
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    \36\ Id.
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    Third, as described above in Section I.B., a certain municipality 
or issuer may present unique risks to NSCC not otherwise captured by 
the proposed methodology's use of a percentage derived from the maximum 
of the applicable tenor-based index, municipal bond sector-based 
indices, and high-yield indices. In such scenarios, NSCC proposes to 
have the ability to use the highest percentage generated for any 
municipal bond group when calculating the haircut-based volatility 
component for municipal bonds issued by the municipality or issuer 
presenting such unique risks. By enabling NSCC to increase margin 
requirements in such scenarios, the proposed rule change should help 
limit NSCC's exposure such that, in the event of a default of a member 
with positions in uniquely risky municipal bonds, NSCC's operations 
would not be disrupted and non-defaulting members would not be exposed 
to losses that they cannot anticipate or control. Accordingly, the 
Commission believes that NSCC's proposed discretion to increase margin 
requirements in scenarios where municipal bonds present unique risks 
should promote the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F).\37\ 
Moreover, by enabling NSCC to increase margin requirements in scenarios 
where municipal bonds present unique risks, the proposed rule change 
would help ensure that NSCC maintains adequate funds necessary to 
manage the risks associated with performing its clearance and 
settlement functions, which could, in turn, help reduce the amount of 
credit losses that would potentially be charged to the Clearing Fund 
contributions of non-defaulting members in the event of a default. 
Accordingly, the Commission finds that NSCC's proposed discretion to 
increase margin requirements in scenarios where municipal bonds present 
unique risks should safeguard the securities and funds that are in 
NSCC's custody or control or for which NSCC is responsible, consistent 
with Section 17A(b)(3)(F) of the Act.\38\
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    \37\ Id.
    \38\ Id.
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B. 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.\39\
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    \39\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above in Section I.B., NSCC proposes to replace the 
current

[[Page 9846]]

methodology for calculating municipal bond haircut percentages with a 
methodology that would utilize the historical returns of one or more 
benchmark indices over a look-back period of not shorter than 10 years, 
using a minimum 99% calibration percentile. These changes would result 
in more precisely determined margin amounts, while still managing 
NSCC's applicable risks well above the 99% confidence level.\40\ 
Accordingly, the Commission believes that the proposed methodology is 
consistent with Rule 17Ad-22(e)(4)(i) because it should enable NSCC to 
effectively identify, measure, monitor, and manage its credit exposures 
to members with positions in municipal bonds, including by maintaining 
sufficient financial resources to cover NSCC's credit exposure to such 
members fully with a high degree of confidence.\41\
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    \40\ Notice of Filing, supra note 4 at 151-52.
    \41\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above in Section I.B., NSCC proposes to re-calibrate 
the municipal bond haircut percentages no less frequently than 
annually. The proposal would require NSCC to regularly review the 
municipal bond haircut percentages, thereby helping to ensure that the 
haircut percentages and resulting margin levels take into account any 
changes over time to the risk attributes of municipal bonds. 
Accordingly, the Commission believes that the proposal to re-calibrate 
the municipal bond haircut percentages no less frequently than annually 
is consistent with Rule 17Ad-22(e)(4)(i) because it should allow NSCC 
to effectively identify, measure, monitor, and manage its credit 
exposures to members with positions in municipal bonds, including by 
maintaining sufficient financial resources to cover NSCC's credit 
exposure to such members fully with a high degree of confidence.\42\
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    \42\ Id.
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    As described above in Section I.B., NSCC proposes to have the 
ability to use the highest percentage generated for any municipal bond 
group when calculating the haircut-based volatility component for 
municipal bonds issued by a municipality or issuer presenting unique 
risks not otherwise captured by the calculations in the proposed 
methodology. Such discretion should help ensure that NSCC collects 
sufficient margin amounts with respect to those securities. 
Accordingly, the Commission believes that the proposed ability to apply 
the highest percentage to such municipal bonds is consistent with Rule 
17Ad-22(e)(4)(i) because it should better enable NSCC to effectively 
identify, measure, monitor, and manage its credit exposures to members 
with positions in such municipal bonds, including by maintaining 
sufficient financial resources to cover NSCC's credit exposure to such 
members fully with a high degree of confidence.\43\
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    \43\ Id.
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C. Consistency With Rules 17Ad-22(e)(6)(i) and (v)

    Rule 17Ad-22(e)(6)(i) requires 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.\44\ Rule 
17Ad-22(e)(6)(v) requires 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.\45\
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    \44\ 17 CFR 240.17Ad-22(e)(6)(i).
    \45\ 17 CFR 240.17Ad-22(e)(6)(v).
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    As described above in Section I.B., NSCC proposes to replace the 
current methodology for calculating municipal bond haircut percentages 
with a methodology that would utilize the historical returns of one or 
more benchmark indices over a look-back period of not shorter than 10 
years, using a minimum 99% calibration percentile. NSCC designed the 
proposed methodology to generate margin amounts that are more 
commensurate with the risk attributes of municipal bonds than the 
current methodology. Accordingly, the Commission believes that the 
proposed methodology is consistent with Rules 17Ad-22(e)(6)(i) and (v) 
because it is designed to establish a risk-based margin system that (1) 
considers and produces relevant margin levels commensurate with the 
risks and particular attributes of municipal bonds, and (2) uses an 
appropriate method for measuring credit exposure that accounts for 
municipal bond risk factors and portfolio effects.\46\
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    \46\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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    As described above in Section I.B., NSCC proposes to re-calibrate 
the municipal bond haircut percentages no less frequently than 
annually. The proposal would require NSCC to regularly review the 
municipal bond haircut percentages, thereby helping to ensure that the 
haircut percentages and resulting margin levels take into account any 
changes over time to the risk attributes of municipal bonds. 
Accordingly, the Commission believes that the proposal to re-calibrate 
the municipal bond haircut percentages no less frequently than annually 
is consistent with Rules 17Ad-22(e)(6)(i) and (v) because it would 
contribute to a risk-based margin system designed to (1) consider and 
produce relevant margin levels commensurate with the risks and 
particular attributes of municipal bonds, and (2) use an appropriate 
method for measuring credit exposure that accounts for municipal bond 
risk factors and portfolio effects.\47\
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    \47\ Id.
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    As described above in Section I.B., NSCC proposes to have the 
ability to use the highest percentage generated for any municipal bond 
group when calculating the haircut-based volatility component for 
municipal bonds issued by a municipality or issuer presenting unique 
risks not otherwise captured by the calculations in the proposed 
methodology. This discretion should help ensure that NSCC collects 
sufficient margin amounts with respect to those securities. 
Accordingly, the Commission believes that the proposed discretion to 
apply the highest percentage to such municipal bonds is consistent with 
Rules 17Ad-22(e)(6)(i) and (v) because it would contribute to a risk-
based margin system designed to (1) consider and produce relevant 
margin levels commensurate with the risks and particular attributes of 
municipal bonds, and (2) use an appropriate method for measuring credit 
exposure that accounts for municipal bond risk factors and portfolio 
effects.\48\
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    \48\ Id.
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III. 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 \49\ and 
the rules and regulations promulgated thereunder.
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    \49\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\50\ that proposed rule change SR-NSCC-2019-004, be, and hereby is, 
APPROVED.\51\
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    \50\ 15 U.S.C. 78s(b)(2).
    \51\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

[[Page 9847]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03317 Filed 2-19-20; 8:45 am]
BILLING CODE 8011-01-P