Document ID: SEC-2022-0959-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2022-07-20T04:00Z

[Federal Register Volume 87, Number 138 (Wednesday, July 20, 2022)]
[Notices]
[Pages 43355-43364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-15451]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95286; File No. SR-NSCC-2022-009]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Adopt Intraday 
Volatility Charge and Eliminate Intraday Backtesting Charge

July 14, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 7, 2022, National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change of NSCC consists of modifications to 
Procedure XV (Clearing Fund Formula and Other Matters) of the NSCC's 
Rules & Procedures (``Rules'') to (1) adopt an intraday volatility 
charge that may be collected by NSCC on an intraday basis as part of 
Members' Required Fund Deposits to the Clearing Fund; and (2) eliminate 
the Intraday Backtesting Charge, as described in greater detail 
below.\3\
---------------------------------------------------------------------------

    \3\ Terms not defined herein are defined in the Rules, available 
at [http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf].
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    NSCC is proposing to enhance its Clearing Fund methodology by 
implementing an intraday volatility charge that may be collected by 
NSCC to mitigate the risks presented by Members' adjusted intraday Net 
Unsettled Positions and Net Balance Order Unsettled Positions 
(hereinafter collectively referred to as ``Net Unsettled Positions'') 
\4\ due to volatility in a Member's own trading activity (referred to 
in this filing as ``volatility risk'') that may occur between the 
collection of Members' Required Fund Deposits at the start of the day 
and the collection of Members' Required Fund Deposits at the start of 
the following Business Day.
---------------------------------------------------------------------------

    \4\ Net Unsettled Positions refer to net positions that have not 
yet passed their settlement date or did not settle on their 
settlement date. See Procedure XV (Clearing Fund Formula and Other 
Matters) of the Rules, id.
---------------------------------------------------------------------------

    In connection with the adoption of an intraday volatility charge 
and following an evaluation of the effectiveness of its margin 
methodology generally, NSCC is also proposing to eliminate the Intraday 
Backtesting Charge.\5\ NSCC would continue to maintain the Regular 
Backtesting Charge that is assessed on Members' start of day portfolio, 
as permitted by, and as described in, the Rules.\6\
---------------------------------------------------------------------------

    \5\ See Procedure XV, Section I.(B)(3) of the Rules, supra note 
3.
    \6\ Id.
---------------------------------------------------------------------------

    These proposed rule changes are described in greater detail below.
(i) Overview of the Required Fund Deposit and NSCC's Clearing Fund
    As part of its market risk management strategy, NSCC manages its 
credit exposure to Members by determining the appropriate Required Fund 
Deposits to the Clearing Fund and monitoring its sufficiency, as 
provided for in the Rules.\7\ The Required Fund Deposit serves as each 
Member's margin.
---------------------------------------------------------------------------

    \7\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters), supra note 3. NSCC's market risk 
management strategy is designed to comply with Rule 17Ad-22(e)(4) 
under the Act, where these risks are referred to as ``credit 
risks.'' 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------

    The objective of a Member's Required Fund Deposit is to mitigate 
potential losses to NSCC associated with liquidating a Member's 
portfolio in the event NSCC ceases to act for that Member (hereinafter 
referred to as a ``default'').\8\ The aggregate of all

[[Page 43356]]

Members' Required Fund Deposits constitutes the Clearing Fund of NSCC. 
NSCC would access its Clearing Fund 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.
---------------------------------------------------------------------------

    \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) of the Rules, supra note 3.
---------------------------------------------------------------------------

    NSCC employs daily backtesting to determine the adequacy of each 
Member's Required Fund Deposit. NSCC compares the Required Fund Deposit 
\9\ for each Member with the simulated liquidation gains/losses using 
the actual positions in the Member's portfolio, and the actual 
historical security returns. NSCC investigates the cause(s) of any 
backtesting deficiencies. As a part of this investigation, NSCC pays 
particular attention to Members with backtesting deficiencies that 
bring the results for that Member below the 99 percent confidence 
target (i.e., greater than two backtesting deficiency days in a rolling 
twelve-month period) to determine if there is an identifiable cause of 
repeat backtesting deficiencies. NSCC also evaluates whether multiple 
Members may experience backtesting deficiencies for the same underlying 
reason.
---------------------------------------------------------------------------

    \9\ For backtesting comparisons, NSCC does not include actual 
collateral posted by the Member or Backtesting Charges that have 
already been collected from that Member. As described in this 
filing, NSCC will also exclude Intraday Collections from its 
intraday backtesting.
---------------------------------------------------------------------------

    Pursuant to the Rules, each Member's Required Fund Deposit consists 
of a number of applicable components, each of which is calculated to 
address specific risks faced by NSCC, as identified within Procedure XV 
of the Rules.\10\ Each Member's start of day Required Fund Deposit is 
calculated overnight, based on the Member's prior end-of-day Net 
Unsettled Positions, and notified to Members early the following 
morning to be deposited by approximately 10:00 a.m. EST.\11\
---------------------------------------------------------------------------

    \10\ Supra note 3.
    \11\ Procedure XV, Sections II(B) of the Rules, supra note 3. 
The Rules provide that required deposits to the Clearing Fund are 
due within one hour of demand, unless otherwise determined by NSCC.
---------------------------------------------------------------------------

    The volatility component of each Member's Required Fund Deposit is 
designed to measure market price volatility of the start of day 
portfolio and is calculated for Members' Net Unsettled Positions. The 
volatility component is designed to capture the market price risk \12\ 
associated with each Member's portfolio at a 99th percentile level of 
confidence. NSCC has two methodologies for calculating the volatility 
component--a ``VaR Charge'' and a haircut-based calculation. The VaR 
Charge applies to the majority of Net Unsettled Positions and is 
calculated 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 concentration threshold 
of the largest non-index position in a portfolio, and (3) a portfolio 
margin floor calculation based on the market values of the long and 
short positions in the portfolio.\13\ The VaR Charge usually comprises 
the largest portion of a Member's Required Fund Deposit.
---------------------------------------------------------------------------

    \12\ Market price risk refers to the risk that volatility in the 
market causes the price of a security to change between the 
execution of a trade and settlement of that trade. This risk is also 
referred to herein as market risk and volatility risk.
    \13\ Procedure XV, Sections I(A)(1)(a)(i) and (2)(a)(i) of the 
Rules, supra note 3.
---------------------------------------------------------------------------

    Certain Net Unsettled Positions are excluded from the calculation 
of the VaR Charge pursuant to Sections I.(A)(1)(a)(ii) and 
I.(A)(2)(a)(ii) of Procedure XV, and are instead subject to a haircut-
based calculation that is calculated by multiplying the absolute value 
of the position by a percent that is determined by NSCC that is (i) not 
less than 10% for securities whose volatility is less amenable to 
statistical analysis and (ii) not less than 2% for securities whose 
volatility is amenable to generally accepted statistical analysis only 
in a complex manner.\14\ Securities that are subject to the haircut-
based calculation include unit investment trusts, corporate and 
municipal bonds and Illiquid Securities (as such term is defined in the 
Rules).\15\ Long Net Unsettled Positions in Family-Issued Securities 
are also excluded from the VaR Charge and are subject to a separate, 
haircut-based charge designed to mitigate wrong-way risk.\16\ The 
charge that is applied to a Member's Required Fund Deposit with respect 
to the volatility component is referred to as the volatility charge and 
is the sum of the applicable VaR Charge and the haircut-based 
calculation.
---------------------------------------------------------------------------

    \14\ Procedure XV, Sections I(A)(1)(a)(ii) and (2)(a)(ii) of the 
Rules, supra note 3.
    \15\ See Rule 1 (Definitions and Descriptions) and Procedure XV, 
Sections I(A)(1)(a)(iii) and (2)(a)(iii) of the Rules, supra note 3.
    \16\ Procedure XV, Sections I(A)(1)(a)(iv) and (2)(a)(iv) of the 
Rules, supra note 3.
---------------------------------------------------------------------------

    The margin requirement differential (``MRD'') component charge is 
calculated as the sum of an exponentially weighted moving average 
(``EWMA'') of positive day over day changes over a 100-day look back 
period in Member's (1) mark-to-market charge and (2) volatility charge, 
times a multiplier calibrated based on backtesting results.\17\ The 
portion of the MRD charge that is calculated as the EWMA of positive 
day over day changes to the Member's volatility component over the look 
back period is referred to as the volatility portion of the MRD charge. 
This volatility portion of the MRD charge is designed to capture 
variability in the volatility charge collected from the Member over the 
look back period. However, the MRD charge would not capture significant 
intraday volatility swings in a Member's positions, which may be 
inconsistent with a Member's historical trading activity.
---------------------------------------------------------------------------

    \17\ See Sections I(A)(1)(e) and (2)(d) of Procedure XV of the 
Rules, supra note 3.
---------------------------------------------------------------------------

    In addition to collecting Required Fund Deposits from Members at 
the start of day, NSCC may collect additional amounts intraday. 
Currently, NSCC may collect an additional intraday mark-to-market 
charge.\18\ Intraday market moves and positions are tracked and this 
additional mark-to-market charge may be collected if the difference 
between the most recent mark-to-market price of a Member's net 
positions and the most recent observed market price exceeds a 
percentage of the Member's volatility charge. All intraday charges are 
due within one hour of demand (unless otherwise determined by 
NSCC).\19\
---------------------------------------------------------------------------

    \18\ See Sections I(B)(5) of Procedure XV of the Rules, supra 
note 3.
    \19\ See supra note 8.
---------------------------------------------------------------------------

    The Backtesting Charge, as described in Section I(B)(3) of 
Procedure XV, may be an additional component of a Member's Required 
Fund Deposit that NSCC may assess at either the start of the day as the 
Regular Backtesting Charge, or on an intraday basis as the Intraday 
Backtesting Charge.\20\ More specifically, NSCC may assess a 
Backtesting Charge against any Member that has a 12-month trailing 
backtesting coverage below the 99 percent backtesting coverage target. 
When calculating a Member's backtesting coverage, NSCC excludes amounts 
already collected as a Backtesting Charge from a Member in calculating 
any applicable Backtesting Charge. Additionally, in response to 
regulatory feedback, NSCC is enhancing the calculation of its intraday 
backtesting coverage to exclude Intraday Collections. As described in 
this filing, this enhancement will impact the

[[Page 43357]]

calculation of the Intraday Backtesting Charge.
---------------------------------------------------------------------------

    \20\ Section I(B)(3) of Procedure XV (Clearing Fund Formula and 
Other Matters) of the Rules, supra note 3. See also Release No. 
79167 (October 26, 2016), 81 FR 75883 (November 1, 2016) (File Nos. 
SR-FICC-2016-006; SR-NSCC-2016-004).
---------------------------------------------------------------------------

    If assessed, a Member's Backtesting Charge is generally equal to 
the Member's third largest deficiency, when calculating the Regular 
Backtesting Charge, and fifth largest deficiency, when calculating the 
Intraday Backtesting Charge, that occurred during the previous 12 
months.\21\ As described in Procedure XV, NSCC may adjust the 
Backtesting Charge if it determines that circumstances particular to a 
Member's settlement activity and/or market price volatility warrant a 
different approach to determining or applying such charge in a manner 
consistent with achieving NSCC's backtesting coverage target.\22\
---------------------------------------------------------------------------

    \21\ Id.
    \22\ Id.
---------------------------------------------------------------------------

    NSCC calculates the Backtesting Charge monthly and, based on those 
calculations, may either continue to impose an existing Backtesting 
Charge, impose a new Backtesting Charge or remove an existing 
Backtesting Charge, or it may either increase or decrease a Member's 
existing Backtesting Charge as necessary to maintain its target 
backtesting coverage.
    NSCC regularly assesses market risks as such risks relate to its 
margining methodologies to evaluate whether margin levels are 
commensurate with the particular risk attributes of each relevant 
product, portfolio, and market. The proposed changes to include an 
intraday volatility charge to its Clearing Fund methodology and to 
eliminate the Intraday Backtesting Charge, as described below, is the 
result of NSCC's regular review of the effectiveness of its margining 
methodology. While the start of day volatility charge and other 
components of the Clearing Fund are designed to predict market price 
volatility that could occur after the collection of Required Fund 
Deposits at the start of the day, large and unexpected volatility could 
create exposures that are not captured by those amounts. Therefore, as 
described in greater detail below, the proposed intraday volatility 
charge would allow NSCC to address the risks that are presented by 
significant changes to the size and composition of Members' portfolios 
of Net Unsettled Positions after the collection of Members' Required 
Fund Deposits at the start of the day that may be caused by, for 
example, intraday market volatility or volatility in a Member's own 
trading activity.
    The proposal to eliminate the Intraday Backtesting Charge is driven 
by a few considerations. Primarily, NSCC has determined, in connection 
with recent regulatory feedback, that the current methodology for 
calculating the Intraday Backtesting Charge may make an unreasonable 
assumption that, as described in greater detail below, may lead to 
undercounting of potential backtesting deficiencies. While NSCC 
considered adopting alternative calculation methodologies, it has 
instead determined that it will continue to be able to adequately 
address both its intraday market risk exposures and its backtesting 
coverage metrics if it eliminates the Intraday Backtesting Charge, as 
described in greater detail below.
(ii) Proposed Intraday Volatility Charge
    In order to better address the volatility risks presented by 
Members' adjusted intraday Net Unsettled Positions between start of day 
collections of Required Fund Deposits, NSCC is proposing to implement 
an intraday volatility charge, which it may collect on an intraday 
basis as described below.
    In 2017, NSCC accelerated the time its trade guarantee attaches to 
eligible transactions from midnight of one day after trade date 
(``T+1'') to the point of trade comparison and validation for bilateral 
submissions or to the point of trade validation for locked-in 
submissions.\23\ In order to address the additional risks NSCC would 
face in connection with guaranteeing trades at an earlier point in 
time, NSCC enhanced its Clearing Fund formula. Among those 
enhancements, NSCC adopted the MRD charge, an intraday backtesting 
charge and revised its mark-to-market charge to be collected when 
Members have intraday mark-to-market changes that are significant 
enough that NSCC is exposed to an increased risk of loss as a result of 
such Members' intraday trading activity.\24\ At that time, NSCC also 
established intraday monitoring of volatility in its Members' Net 
Unsettled Positions and currently monitors such volatility in 15-minute 
increments between the collection of start of day Required Fund 
Deposits and end of day settlement. NSCC did not, however, believe an 
intraday volatility charge was necessary to address the risks presented 
by the accelerated trade guarantee, and did not adopt this charge at 
that time.
---------------------------------------------------------------------------

    \23\ See Securities Exchange Act Release Nos. 79598 (December 
19, 2016), 81 FR 94462 (December 23, 2016) (File No. SR-NSCC-2016-
005); 79592 (December 19, 2016), 81 FR 94448 (December 23, 2016) 
(File No. SR-NSCC-2016-803) (``ATG Rule Change''). See also Addendum 
K of the Rules, supra note 3.
    \24\ See id.
---------------------------------------------------------------------------

    Intraday Volatility Charge Calculation. Since that time, through 
its regular monitoring, NSCC has occasionally observed significant 
intraday changes to market price volatility and significant changes to 
the size and composition of Members' portfolios of Net Unsettled 
Positions that could cause the amount collected as the volatility 
charge at the start of that Business Day (``start of day volatility 
charge'') to no longer be sufficient to mitigate the volatility risks 
that such positions present to NSCC. Therefore, NSCC believes it is 
appropriate to implement an intraday volatility charge that, similar to 
the current intraday mark-to-market charge, may be collected by NSCC 
when certain thresholds are met. More specifically, NSCC is proposing 
to utilize its existing intraday monitoring to determine when the 
difference between a Member's (1) start of day volatility charge, 
collected on that Business Day as part of the Member's start of day 
Required Fund Deposit based on that Member's prior end-of-day Net 
Unsettled Positions, and (2) a calculation of the volatility charge 
based on that Member's adjusted intraday Net Unsettled Positions as of 
a point intraday between the collection of the start of day Required 
Fund Deposit and end of day settlement, exceeds 100 percent and the 
amount that would be collected as an intraday volatility charge, 
calculated as described below, would be greater than $250,000.
    In addition to applying these quantitative thresholds, NSCC also 
would not collect an intraday volatility charge in circumstances that 
would be specified in the Rules, as discussed in greater detail below, 
when the risk the proposed charge is designed to mitigate is expected 
to be mitigated by either later submitted or corrected trading 
activity. NSCC would continue to monitor intraday volatility in 15-
minute increments throughout the day, and the calculation of the 
intraday volatility charge would be done at those intervals. While 
collections may occur multiple times throughout the day, intraday 
volatility charges are more likely to be collected later in the day, 
after additional, and potentially offsetting, activity has been 
submitted, as described in greater detail below.
    The amount of intraday volatility charge that NSCC would collect 
from a Member when the charge is applicable would be equal to the 
difference between the start of day volatility charge and the intraday 
calculation of that volatility charge, described above, reduced by the 
amount collected from that Member at the start of that Business Day as 
the volatility portion of the MRD

[[Page 43358]]

charge.\25\ As described above, the volatility portion of the MRD 
charge is designed to measure changes in the volatility charge over the 
historic lookback period. However, risks presented by changes in 
intraday volatility that exceed a 100 percent threshold are not 
captured by the volatility portion of the MRD charge and NSCC believes 
the proposed intraday volatility charge would provide it with a better 
measure of these risks. Therefore, it would not be necessary for NSCC 
to collect as part of the intraday volatility charge any amounts that 
it has already collected as the volatility portion of the MRD charge 
for that Business Day.
---------------------------------------------------------------------------

    \25\ See supra note 13.
---------------------------------------------------------------------------

    NSCC currently excludes long Net Unsettled Positions in Family-
Issued Securities from the calculation of the VaR Charge and instead 
uses a haircut-based calculation for these positions (``FIS 
charge'').\26\ The FIS charge is designed to measure the wrong-way risk 
that could be presented by long Net Unsettled Positions in Family-
Issued Securities and is not a measurement of volatility risk or 
considered a part of the volatility charge. Therefore, because Members 
are charged the FIS charge separately from the volatility charge, NSCC 
would exclude this FIS charge from both components of the intraday 
volatility charge calculation.
---------------------------------------------------------------------------

    \26\ See Sections I(A)(1)(a)(iv) and (2)(a)(iv) of Procedure XV 
of the Rules, supra note 3.
---------------------------------------------------------------------------

    Adjusted Intraday Net Unsettled Positions. In calculating the 
volatility charge based on Members' intraday Net Unsettled Positions, 
NSCC would adjust the Net Unsettled Positions by excluding any position 
for which shares had either been delivered to the CNS System or 
received by the Member from the CNS System to satisfy all or any 
portion of that position. NSCC believes it would be appropriate to 
assume, for purposes of this calculation, that positions for which the 
shares have been delivered and received would settle at the end of the 
day. By adjusting the intraday Net Unsettled Positions to exclude these 
positions, the calculation of the intraday volatility charge would be 
more effectively driven by any significant intraday changes to the 
volatility risks presented by Members' adjusted intraday Net Unsettled 
Positions.
    Additionally, in calculating the intraday volatility charge, NSCC 
would use the same inputs and parameters that were used in the 
calculation of the start of day volatility charge, including, 
initially, end of day price returns, such that, the calculation of the 
volatility charge that would occur intraday for purposes of the 
intraday volatility charge would use the same methodology as the 
calculation of the start of day volatility charge but would occur later 
in the day. While risk related to volatility in intraday prices is 
addressed by the intraday mark-to-market charge, and NSCC believes it 
is appropriate to use some of the same parameters and methodology in 
the intraday volatility charge calculation as it would allow the 
calculation to more accurately reflect the market price volatility 
based on changes in Members' Net Unsettled Positions rather than be 
driven by changes in those parameters, NSCC would explore ways to 
enhance its capabilities, it may, in the future, use intraday price 
returns for the calculation of the intraday volatility charge.
    The proposed methodology would allow NSCC to measure the change in 
the volatility charge to determine if such change presents NSCC with 
exposures that are not adequately addressed by the start of day 
volatility charge on deposit in the Clearing Fund. If the threshold is 
met and NSCC determines it is appropriate to collect an intraday 
volatility charge, that charge would equal the difference between the 
two volatility charge calculations. By collecting an amount that is 
measured as the difference between the two volatility charge 
calculations, NSCC would be able to supplement the volatility charge 
already on deposit in its Clearing Fund with an amount that measures 
the change in volatility that has occurred since the Required Fund 
Deposit was collected at the start of the day.
    Thresholds in Applying the Charge. NSCC would only determine if an 
intraday volatility charge is appropriate if two thresholds are met and 
the exceptions to the intraday volatility charge, as described in more 
detail below, are not applicable. The thresholds to the application of 
the intraday volatility charge are (1) when the difference between the 
two calculations of the volatility charge exceeds 100 percent, and (2) 
the amount that would be calculated as an intraday volatility charge 
would be greater than $250,000.
    First, NSCC believes the 100 percent threshold is appropriate 
because, in normal market conditions, intraday changes in volatility 
that are lower than this threshold are more likely due to normal market 
fluctuations, and NSCC believes that only an increase that is larger 
than 100 percent would require mitigation through the intraday 
volatility charge. However, risks presented by changes in intraday 
volatility that exceed a 100 percent threshold could expose NSCC to 
additional market price risk for which NSCC currently does not have 
risk mitigation measures. Based on past observations, changes in the 
calculated volatility charge that exceed this threshold have generally 
occurred when a Member's portfolio composition changed significantly 
due to increased volumes in either all or specific securities. The 
proposed intraday volatility charge would provide NSCC with the ability 
to mitigate this material change in risk.
    Similar to the intraday mark-to-market charge, NSCC would retain 
the discretion to lower this threshold if it determines that a 
reduction in this threshold is appropriate to mitigate risks to NSCC, 
for example during volatile market conditions or market events that 
cause increases in trading volume, or when NSCC believes a lower 
threshold is appropriate to mitigate risks presented by Members whose 
portfolios may present relatively greater risks to NSCC on an overnight 
basis. In circumstances when NSCC determines it is appropriate to 
reduce the threshold, the reduced threshold would apply to all Members. 
This discretion would allow NSCC to collect an intraday volatility 
charge earlier in light of increased levels of volatility risks. In 
these circumstances, a lower threshold would allow NSCC to more 
proactively preserve the coverage of its Required Fund Deposit.
    Second, NSCC also believes it is appropriate to apply an additional 
threshold that would limit the collection of intraday volatility 
charges to when the amount that would be collected would be greater 
than $250,000. NSCC believes amounts below this threshold, which is the 
minimum required deposit to the Clearing Fund, would be immaterial to 
address any increased risk.
    Exceptions to Collecting an Intraday Volatility Charge. As stated 
above, in certain specified circumstances, NSCC would not collect an 
intraday volatility charge from a particular Member or Members, despite 
a calculation that exceeds the quantitative thresholds. NSCC is 
proposing to amend the Rules to state that an intraday volatility 
charge would not be collected if (a) trades submitted later in the day 
would offset trades submitted earlier in the day, such that the 
thresholds would not have been met if such activity had been submitted 
earlier in the day, or (b) the threshold was met due to the submission 
of an erroneous trade that can be corrected.
    As stated above, NSCC would monitor volatility in 15-minute 
increments

[[Page 43359]]

between the collection of start of day Required Fund Deposits and end 
of day settlement. When the threshold is exceeded during normal market 
conditions earlier in the trading day, NSCC would typically not collect 
an intraday volatility charge until later in the day when Members have 
had an opportunity to submit trading activity that would be expected to 
offset trades submitted earlier in the day that caused the thresholds 
to be met. Off-setting trading activity may be submitted to NSCC later 
in the day in connection with Members' business model or trading 
practices. Additionally, a system issue or other error could cause a 
delay in the submission of activity.
    NSCC believes that, in circumstances when later submitted activity 
offsets earlier submitted activity, whether that is due to Member's 
normal business practices or operational delays, an intraday volatility 
charge would not be necessary because the risk presented by the 
temporary increase in volatility would be expected to be mitigated by 
other clearing activity or corrected submissions that is submitted 
later in the day. As noted above, NSCC would monitor intraday 
volatility in 15-minute increments throughout the day and would 
continuously re-calculate the intraday volatility charge at those 
intervals. Therefore, NSCC would be able to determine in the subsequent 
calculations if later submitted or corrected trading activity was 
adequate to mitigate the observed increase in volatility risk or if an 
intraday volatility charge should be collected.
    In determining not to collect an intraday volatility charge, 
despite a threshold trigger, NSCC would utilize the same escalation 
procedures that are currently in place when making similar 
determinations with respect to its current authority to waive intraday 
mark-to-market charges. Specifically, NSCC would utilize a 
predetermined escalation matrix that identifies the level of the 
required approver within the NSCC Market Risk group based on the amount 
of the calculated intraday volatility charge would not be collected. A 
decision not to collect the charge would be made based on documentation 
provided to the required approver regarding the circumstances of the 
calculated charge.
    Application to Positions in Securities Financing Transactions. NSCC 
has established a clearing service for securities financing 
transactions (``SFT Clearing Service'') to make central clearing 
available at NSCC for equity securities financing transactions 
(``SFTs'').\27\ NSCC would include the intraday volatility charge among 
the margin charges that are applicable to SFT positions cleared through 
the SFT Clearing Service. NSCC would implement this change by amending 
Section 12(c) of the proposed Rule 56 to include the intraday 
volatility charge as one of the components of Required SFT Deposit of 
an SFT Member, as such term is defined in Rules.\28\
---------------------------------------------------------------------------

    \27\ See Rule 56 (Securities Financing Transactions Clearing 
Service) of the Rules, supra note 3.
    \28\ Id.
---------------------------------------------------------------------------

Transparency, Notification and Collection of Intraday Volatility Charge
    The proposed intraday volatility charge would provide NSCC with an 
important tool to address significant changes in the volatility risks 
presented to NSCC, such that these risks presented by Members' adjusted 
intraday Net Unsettled Positions are no longer adequately covered by 
the Required Fund Deposit collected at the start of day.
    The proposed change would provide Members with transparency in the 
Rules regarding when and how NSCC may collect additional amounts to 
address this increased risk. Members would also be able to continue to 
use existing tools, including the ability to view the calculated 
volatility charge in 15-minute increments throughout the Business Day 
and the VaR (Value at Risk) Margin Calculator available in the NSCC 
Risk Client Portal, to monitor their positions and anticipate any 
potential intraday charges.
    Additionally, and similarly to the process used today for the 
intraday mark-to-market charge, NSCC would provide its Members notice 
on days when there is increased volatility in the market, that an 
intraday charge may be collected. If NSCC determines to collect an 
intraday volatility charge pursuant to the Rules, it would issue a 
notice by electronic mail to those Members who are subject to that 
charge. Members would then be able to view the amount to be collected 
in NSCC's Clearing Fund Management system. Members who receive that 
notice would be required to fund the amount of the intraday volatility 
charge within one hour of that notice, pursuant to Section II(B) of 
Procedure XV.\29\ This notification and collection process would be 
identical to the current process that is followed for the notification 
and collection of the intraday mark-to-market process.
---------------------------------------------------------------------------

    \29\ Supra note 8.
---------------------------------------------------------------------------

Proposed Intraday Volatility Charge and Other Margin Charges
    As discussed above, the proposed intraday volatility charge would 
be implemented with a calculation methodology that is similar to the 
calculation of the current intraday mark-to-market charge. As noted 
above, the intraday mark-to-market charge addresses the risk presented 
by changes in market prices over the course of the day, where the 
proposed intraday volatility charge would address the risk presented by 
changes in a Member's own clearing activity that may occur over the 
course of the day. Despite the difference in risks that these charges 
are designed to address, both intraday charges would be applied with a 
similar methodology. For example, both intraday charges would be 
generally measured as the difference between the charge collected at 
the start of the day and a calculation of that charge intraday. Both 
intraday charges would also be triggered when a threshold is met, and 
in both cases, NSCC would retain discretion in the ability to lower 
that threshold. NSCC would also utilize the same notification process 
for the proposed intraday volatility charge that currently used to 
notify Members when an intraday mark-to-market charge is assessed. By 
structuring the proposed intraday volatility charge similarly to the 
current intraday mark-to-market charge, NSCC believes the proposal 
would provide Members with predictability and clarity into how the 
proposal charge would be calculated and assessed.
    Currently, pursuant to Sections I(A)(1)(c) and I(A)(2)(c) of 
Procedure XV, NSCC may collect an additional payment, referred to as 
the ``special charge,'' from Members in view of price fluctuations in 
or volatility or lack of liquidity of any security, based on factors 
that NSCC determines to be appropriate.\30\ NSCC has rarely assessed a 
special charge, but believes this ``special charge'' continues to be a 
valuable risk management tool that would allow it to collect additional 
amounts in the event of unpredictable, unusual or sudden market events 
that present additional risks to NSCC that its margining methodology is 
not able to predict. While the proposed intraday volatility charge 
would provide NSCC with an additional tool to address events that cause 
Members' positions to increase the levels of volatility risks, it will 
be used only when it is triggered by the applicable calculation. When 
the intraday volatility charge is triggered, a

[[Page 43360]]

special charge would not also be required from a Member to address the 
same volatility risks. Likewise, if NSCC is exposed to volatility risks 
that are not captured by the intraday volatility charge calculation or 
by other available margin charges, NSCC would have the ability to 
mitigate those risks through the collection of a special charge.
---------------------------------------------------------------------------

    \30\ See supra note 3.
---------------------------------------------------------------------------

    Finally, as noted above, the MRD charge is an additional component 
of Members' Required Fund Deposit that is designed to capture some of 
the risk presented by increased volatility between collection of 
Required Fund Deposits.\31\ Larger increases in volatility that the MRD 
charge is not able to predict and capture in the start of day 
collection of Required Fund Deposits, however, will be captured by the 
proposed intraday volatility charge. Because of the ability of 
volatility portion of the MRD charge to manage the risk of some 
increase to volatility between collection of Required Fund Deposits, 
NSCC would adjust the amount of intraday volatility charge it would 
collect from Members when the threshold is met by the amount of the 
volatility portion of the MRD charge collected from a Member at the 
start of that Business Day.
---------------------------------------------------------------------------

    \31\ See supra note 17.
---------------------------------------------------------------------------

(iii) Proposal To Eliminate the Intraday Backtesting Charge
    NSCC is also proposing to eliminate the Intraday Backtesting 
Charge. The Backtesting Charge, which may be collected as an Intraday 
Backtesting Charge or a Regular Backtesting Charge collected at the 
start of the day, was adopted in 2016 shortly after NSCC implemented 
the intraday mark-to-market charge as part of its proposal to 
accelerate its trade guaranty (``ATG'').\32\ Intraday margin 
surveillance, collection and backtesting performance were key issues 
during the development and proposal of ATG. While NSCC had also 
considered adopting an intraday volatility charge as part of the ATG 
proposal, at that time it was decided that NSCC would continue to 
monitor intraday volatility exposures, with the expectation of later 
developing an intraday volatility charge. As noted above, the proposal 
to now eliminate the Intraday Backtesting Charge is driven by a few 
considerations.
---------------------------------------------------------------------------

    \32\ Release No. 79167 (October 26, 2016), 81 FR 75883 (November 
1, 2016) (File Nos. SR-FICC-2016-006; SR-NSCC-2016-004).
---------------------------------------------------------------------------

    First, in connection with recent regulatory feedback, NSCC has 
determined that the current methodology for calculating the Intraday 
Backtesting Charge makes an unreasonable assumption that NSCC would 
cease to act for a Member that has paid all of its intraday margin 
requirements. As a result, this calculation methodology may 
underestimate a Member's backtesting losses and undercounting potential 
backtesting deficiencies. In light of this, NSCC considered revising 
the methodology for calculating the Intraday Backtesting Charge to 
exclude amounts it has already collected from the Member.\33\ However, 
a calculation that disregards intraday margin collections would 
penalize Members for making intraday margin deposits and be considered 
double margining.
---------------------------------------------------------------------------

    \33\ NSCC recently filed a proposed rule change to amend Section 
I.(B)(3) of Procedure XV of the Rules to clarify that the 
calculation methodology for the Backtesting Charge does not include 
amounts already collected as a Backtesting Charge from that Member. 
Release No. 93678 (November 30, 2021), 86 FR 69109 (December 6, 
2021) (File No. SR-NSCC-2021-014).
---------------------------------------------------------------------------

    More specifically, as stated above, NSCC's daily backtesting is 
designed to measure the adequacy of each Member's Required Fund Deposit 
by comparing the Required Fund Deposit for a Member with the simulated 
liquidation gains/losses using the actual positions in that Member's 
portfolio, and the actual historical security returns. Margin amounts 
collected intraday from a Member are a part of their Required Fund 
Deposit. If NSCC collects margin from a Member intraday, but does not 
include that amount in its Required Fund Deposit in connection with its 
backtesting, resulting in a backtesting deficiency and a subsequent 
Intraday Backtesting Charge, that Member would have covered its risk to 
NSCC twice--first as intraday margin collected from that Member and 
second as an Intraday Backtesting Charge. Therefore, NSCC has 
determined to eliminate the Intraday Backtesting Charge rather than 
exclude amounts collected intraday from Members in its calculation.
    Second, NSCC believes it will continue to be able to adequately 
address both its intraday market risk exposures and its backtesting 
coverage metrics if it eliminates the Intraday Backtesting Charge. On 
an intraday basis, NSCC would continue to rely on both the intraday 
mark-to-market charge and the proposed intraday volatility charge to 
address intraday exposures presented by price volatility and changes to 
its Members' positions intraday. Further, in connection with its daily 
backtesting, NSCC will monitor the intraday backtesting metric 
inclusive of all intraday collections to assess the continued 
effectiveness of its intraday margining process. Additionally, NSCC 
would maintain the Regular Backtesting Charge, which is collected at 
the start of the day, to support its backtesting coverage. Studies 
reviewing the impact of removing the Intraday Backtesting Charge on 
NSCC's backtesting coverage metrics, described in greater detail below, 
indicate that this proposal would not have a significant impact on 
NSCC's ability to maintain its backtesting coverage target.
    Therefore, given the deficiencies in the current calculation of the 
Intraday Backtesting Charge and the risks related to adjustments to 
this calculation that would address those deficiencies, and in light of 
both the enhancements NSCC has made to its intraday margining since the 
adoption of the Intraday Backtesting Charge as well as its proposal to 
now adopt an intraday volatility charge, NSCC has determined it is 
appropriate to eliminate the Intraday Backtesting Charge.
(iv) Proposed Changes to Procedure XV of the Rules
    In order to implement the proposed intraday volatility charge, NSCC 
would amend Procedure XV to add a new subsection 6 to Section I.(B) of 
Procedure XV of the Rules. This new subsection would describe the 
thresholds for collecting an intraday volatility charge, the exceptions 
to the collection of the charge when those thresholds are met, and the 
calculation of that charge. The proposed change would also describe 
NSCC's discretion to reduce the 100 percent threshold and the 
circumstances in which it may exercise that discretion.
    The proposed rule change would, to a certain extent, mirror the 
description of the current intraday mark-to-market charge, which has a 
similar percent threshold and calculation and for which NSCC retains 
similar discretion regarding the ability to reduce the percent 
threshold. By using a similar calculation and applying similar 
discretion to that already used for the intraday mark-to-market, NSCC 
would adopt a rule change that is clear and understandable by its 
Members.
    In order to eliminate the Intraday Backtesting Charge, NSCC would 
amend Section I.(B)(3) of Procedure XV, where the Backtesting Charge is 
described, to eliminate references to the Intraday Backtesting Charge.
(v) Impact Study Results
    With respect to the proposed intraday volatility charge, NSCC has 
provided the Commission with the results of an impact study that 
reviewed Member positions at 4:00 p.m. EST between January 3, 2020 and 
May 28, 2021. This

[[Page 43361]]

study showed the proposal would have resulted in approximately eight 
intraday volatility charges collected on an average day during that 
time period, and such charges would have been an average of $31.6 
million, ranging in size from $251 thousand to $1.35 billion.
    With respect to the proposal to eliminate the Intraday Backtesting 
Charge, NSCC has provided the Commission with the results of an impact 
study that reviewed the impact the proposal would have had on both end 
of day backtesting and intraday backtesting between February 2021 and 
February 2022. During this time period, NSCC collected a daily average 
of $30.0 million in total Intraday Backtesting Charge collected from 15 
Members. The Intraday Backtesting Charges that made up this total 
amount averaged approximately $2.0 million, ranging in size from $10 
thousand to $21.1 million. While NSCC would not have collected these 
amounts if the proposal was in place during this time period, the 
results of the study showed that the end of day backtesting would have 
remained above the 99% coverage target during that time period and 
would have had an immaterial impact on intraday backtesting results, 
causing backtesting to drop below the 99% coverage target slightly in 
only two instances. The backtesting results would not be materially 
impacted by the proposal because the Intraday Backtesting Charges 
generally do not represent a large portion of the total Clearing Fund 
collected from Members and the proposal to introduce an intraday 
volatility charge would, when applicable, allow NSCC to collect 
additional amounts.
(vi) Implementation Timeframe
    NSCC would implement the proposed changes no later than 10 Business 
Days after the approval of the proposed rule change by the Commission. 
NSCC would announce the effective date of the proposed changes by 
Important Notice posted to its website.
2. Statutory Basis
    NSCC believes the proposed changes are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, NSCC 
believes the proposed change is consistent with Section 17A(b)(3)(F) of 
the Act,\34\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii), 
each promulgated under the Act,\35\ for the reasons described below.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78q-1(b)(3)(F).
    \35\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(23)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires that the rules of NSCC be 
designed to, among other things, assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible and be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\36\ NSCC 
believes the proposed change to implement an intraday volatility charge 
is designed to assure the safeguarding of securities and funds which 
are in its custody or control or for which it is responsible because it 
is designed to mitigate changes in volatility that could occur intraday 
and increase the risks to NSCC related to liquidating a Member's 
portfolio following that Member's default. Specifically, the proposed 
intraday volatility charge would allow NSCC to collect financial 
resources to cover its exposures that it may face due to increases in 
volatility that occur between collections of start-of-day Required Fund 
Deposits.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Clearing Fund is a key tool that NSCC uses to mitigate 
potential losses to NSCC associated with liquidating a Member's 
portfolio in the event of Member default. Therefore, the proposed 
change to include an intraday volatility charge among the Clearing Fund 
components, when applicable, would enable NSCC to better address any 
changes to market price volatility or the size of a Member's portfolio 
of Net Unsettled Positions that occur intraday, such that, in the event 
of Member default, NSCC's operations would not be disrupted and non-
defaulting Members would not be exposed to losses they cannot 
anticipate or control. In this way, the proposed change to implement 
the intraday volatility charge 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, consistent with Section 17A(b)(3)(F) of 
the Act.\37\
---------------------------------------------------------------------------

    \37\ Id.
---------------------------------------------------------------------------

    Furthermore, NSCC believes the proposal to eliminate the Intraday 
Backtesting Charge is consistent with the requirements of Section 
17A(b)(3)(F) of the Act because it would eliminate a charge that is 
currently calculated based on an unreasonable assumption and is no 
longer needed for NSCC to address its intraday market risk exposures 
and backtesting coverage metrics. By eliminating this charge, the 
proposal would allow NSCC to more accurately and, therefore, 
effectively measure its intraday risk exposures, which NSCC believes 
would promote the prompt and accurate clearance and settlement of 
securities transactions. As such, NSCC believes that the proposed 
change would be consistent with Section 17A(b)(3)(F) of the Act.\38\
---------------------------------------------------------------------------

    \38\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Act 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.\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    As described above, NSCC believes the proposed change to adopt an 
intraday volatility charge would enable it to better identify, measure, 
monitor, and, through the collection of Members' Required Fund 
Deposits, manage its credit exposures to Members by maintaining 
sufficient resources to cover those credit exposures fully with a high 
degree of confidence. Specifically, NSCC believes that the proposed 
intraday volatility charge would effectively mitigate the risks related 
to intraday increases in volatility and would address the increased 
risks NSCC may face related to liquidating a Member's portfolio 
following that Member's default. Therefore, NSCC believes the proposal 
would enhance NSCC's ability to effectively identify, measure and 
monitor its credit exposures and would enhance its ability to maintain 
sufficient financial resources to cover its credit exposure to each 
participant fully with a high degree of confidence. As such, NSCC 
believes the proposed change to adopt an intraday volatility charge is 
consistent with Rule 17Ad-22(e)(4)(i) under the Act.\40\
---------------------------------------------------------------------------

    \40\ Id.
---------------------------------------------------------------------------

    NSCC also believes the proposal to eliminate the Intraday 
Backtesting Charge is consistent with Rule 17Ad-22(e)(4)(i) under the 
Act \41\ because it would eliminate a charge that is currently 
calculated based on an unreasonable assumption and is no longer needed 
for NSCC to address its intraday market risk exposures and backtesting 
coverage metrics. By eliminating this charge, the proposal would allow 
NSCC to more accurately and, therefore, effectively identify,

[[Page 43362]]

measure, monitor, and manage its credit exposures to participants. As 
such, NSCC believes this proposed change is consistent with Rule 17Ad-
22(e)(4)(i) under the Act.\42\
---------------------------------------------------------------------------

    \41\ Id.
    \42\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act requires, in part, that NSCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    The Required Fund Deposits are made up of risk-based components (as 
margin) that are calculated and assessed daily to limit NSCC's credit 
exposures to Members. NSCC's proposed change to introduce an intraday 
volatility charge is designed to more effectively address the risks 
presented by significant intraday changes to market price volatility or 
a Member's portfolio of Net Unsettled Positions. NSCC believes the 
addition of the intraday volatility charge would enable NSCC to assess 
a more appropriate level of margin that accounts for increases in these 
volatility risks that may occur intraday. This proposed change is 
designed to assist NSCC in maintaining a risk-based margin system that 
considers, and produces margin levels commensurate with, the risks of 
portfolios that experience significant volatility on an intraday basis. 
Therefore, NSCC believes the proposed change to adopt an intraday 
volatility charge is consistent with Rule 17Ad-22(e)(6)(i) under the 
Act.\44\
---------------------------------------------------------------------------

    \44\ Id.
---------------------------------------------------------------------------

    NSCC also believes the proposal to eliminate the Intraday 
Backtesting Charge is consistent with Rule 17Ad-22(e)(6)(i) under the 
Act.\45\ Given the deficiencies in the current calculation of the 
Intraday Backtesting Charge and the risks related to adjustments to 
this calculation that would address those deficiencies, NSCC believes 
that the proposal to eliminate the Intraday Backtesting Charge would 
support its continued maintenance of a risk-based margin system that 
considers, and produces margin levels commensurate with, the risks of 
its Members' portfolios. As such, NSCC believes the proposal is 
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\46\
---------------------------------------------------------------------------

    \45\ Id.
    \46\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(23)(ii) under the Act requires that NSCC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for providing sufficient information to 
enable participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in NSCC.\47\ NSCC is 
proposing to amend the Rules to include a description of the intraday 
volatility charge, including the thresholds that would trigger the 
collection of the charge, the exceptions to the collection of the 
charge when the thresholds are met, the method by which NSCC would 
calculate that charge, and NSCC's discretion to reduce the percent 
threshold that triggers the collection of the charge, including the 
circumstances when NSCC may exercise this discretion.
---------------------------------------------------------------------------

    \47\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------

    Through these proposed amendments to the Rules, the proposal would 
assist NSCC in providing its Members with sufficient information to 
identify and evaluate the risks and costs, in the form of Required Fund 
Deposits to the Clearing Fund, that they incur by participating in 
NSCC. Additionally, the proposed intraday volatility charge would be 
calculated in a way that is similar to the calculation of the current 
intraday mark-to-market charge, as described in greater detail above, 
providing Members with consistency and, therefore, a clearer 
understanding of the methodology used to calculate this proposed 
charge. The proposed changes would also disclose NSCC's discretion in 
lowering the percent threshold that triggers the collection of the 
charge and would provide examples of when such discretion may be 
exercised.
    In this way, NSCC believes the proposed changes are consistent with 
Rule 17Ad-22(e)(23)(ii) under the Act.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    NSCC believes that the proposed change to adopt an intraday 
volatility charge could have an impact on competition. Specifically, 
NSCC believes the proposed charge could burden competition because it 
would result in larger Required Fund Deposit amounts for Members when 
the intraday volatility charge is applicable and result in a Required 
Fund Deposit that is greater than the amount calculated pursuant to the 
current formula.
    The impacts of this proposal on a particular Member would depend on 
the size and composition of the Member's portfolio and the potential 
market volatility of positions in that portfolio. The proposed change 
is not designed in a way that is intended to or expected to impact 
Members of a certain legal entity type or size or who employ a 
particular business model. NSCC is proposing to specify in the Rules 
the circumstances in which NSCC would not collect an intraday 
volatility charge that is otherwise triggered by the thresholds. Such 
circumstances would account for Members' business practices that may 
result in the later submission of trading activity that would offset 
trades submitted earlier in the day. As described above, NSCC would 
also determine not to collect an intraday volatility charge if the 
amount would be $250,000 or less. NSCC believes these exceptions to the 
collection of the intraday volatility charge would mitigate any 
unintended disparate impacts on Members of a certain size or who have a 
certain business model. In this way, NSCC expects that Members that 
present similar adjusted intraday Net Unsettled Positions, regardless 
of the type or size of Member or a Member's particular business 
practices, would have similar impacts on their Required Fund Deposit 
amounts as a result of the proposal.
    When the proposal results in a larger Required Fund Deposit, the 
proposed change could burden competition for Members that have lower 
operating margins or higher costs of capital compared to other Members. 
However, the increase in Required Fund Deposit would be in direct 
relation to the specific risks presented by each Member's adjusted 
intraday Net Unsettled Positions, and each Member's Required Fund 
Deposit would continue to be calculated with the same parameters and at 
the same confidence level for each Member. Therefore, because the 
impact of the proposal on a Member is related to the specific risks 
presented by that Member's clearing activity and not on the type or 
size of a Member, NSCC believes that any burden on competition imposed 
by the proposed change would be both necessary and appropriate in 
furtherance of NSCC's efforts to mitigate risks and meet the 
requirements of the Act, as described in this filing and further below.
    Additionally, NSCC would use apply specified, risk-based exceptions 
to collecting the intraday volatility charge when the thresholds are 
triggered. As described above, NSCC would not collect an intraday 
volatility charge if the thresholds are triggered due to these 
specified circumstances, rather than due

[[Page 43363]]

to an increase in risk exposures presented by a Member's adjusted 
intraday Net Unsettled Positions that would not be mitigated by later 
trading activity. In such cases, any burden on competition imposed on 
Members who are assessed the charge as compared to Members who are not 
assessed the charge due to these specified circumstances would be due 
to the application of risk-based criteria that is specified in the 
Rules and would be necessary and appropriate in furtherance of NSCC's 
efforts to mitigate risks and meet the requirements of the Act, as 
described in this filing and further below.
    NSCC believes the above described burden on competition that may be 
created by the proposed intraday volatility charge would be necessary 
in furtherance of the Act, specifically Section 17A(b)(3)(F) of the 
Act.\49\ As stated above, the proposed intraday volatility charge is 
designed to address the risks of increases in market price volatility 
or other changes to a Member's portfolio on an intraday basis that 
could increase the costs to NSCC of liquidating a Member portfolio in 
the event of the Member's default. Specifically, the proposed intraday 
volatility charge would allow NSCC to collect sufficient financial 
resources to cover its exposure that it may face increased costs in 
liquidating positions that experience intraday volatility that is not 
captured by the start of day volatility charge or the volatility 
portion of the MRD charge. Therefore, NSCC believes this proposed 
change is necessary and appropriate in furtherance of the requirements 
of Section 17A(b)(3)(F) of the Act, which requires that the Rules be 
designed to assure the safeguarding of securities and funds that are in 
NSCC's custody or control or which it is responsible.\50\
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78q-1(b)(3)(F).
    \50\ Id.
---------------------------------------------------------------------------

    NSCC believes these proposed change would also support NSCC's 
compliance with Rule 17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under 
the Act, which require NSCC to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to (x) 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence; and (y) cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\51\
---------------------------------------------------------------------------

    \51\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------

    As described above, NSCC believes the introduction of the intraday 
volatility charge would allow NSCC to employ a risk-based methodology 
that would address the increased risks NSCC may face when intraday 
volatility changes a Member's portfolio such that the volatility charge 
and MRD charge collected at the start of the day no longer addresses 
the risks these positions present to NSCC. Therefore, the proposed 
change would better limit NSCC's credit exposures to Members, necessary 
and appropriate in furtherance of the requirements of Rule 17Ad-
22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act.\52\
---------------------------------------------------------------------------

    \52\ Id.
---------------------------------------------------------------------------

    NSCC believes that the above-described burden on competition that 
could be created by the proposed change would be appropriate in 
furtherance of the Act because such change has been appropriately 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of NSCC or for which it is responsible, as 
described in detail above. The proposed intraday volatility charge 
would also enable NSCC to produce margin levels more commensurate with 
the risks and particular attributes of each Member's portfolio.
    The proposed intraday volatility charge would do this by measuring 
the change in volatility that impacts Members' adjusted Net Unsettled 
Positions and could occur intraday. Therefore, because the proposed 
changes are designed to provide NSCC with an appropriate measure of the 
volatility risks presented by Members' portfolios, NSCC believes the 
proposal is appropriately designed to meet its risk management goals 
and its regulatory obligations.
    NSCC believes it has designed the proposed changes in an 
appropriate way in order to meet compliance with its obligations under 
the Act. Specifically, the proposals would improve the risk-based 
margining methodology that NSCC employs to set margin requirements and 
better limit NSCC's credit exposures to its Members. Therefore, as 
described above, NSCC believes the proposed change is necessary and 
appropriate in furtherance of NSCC's obligations under the Act, 
specifically Section 17A(b)(3)(F) of the Act \53\ and Rule 17Ad-
22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act.\54\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78q-1(b)(3)(F).
    \54\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------

    NSCC does not believe the proposal to eliminate the Intraday 
Backtesting Charge would impact competition. The proposed rule changes 
would eliminate this charge from the Rules, such that it would not be 
applicable to any Members or included in the calculation of any 
Members' Required Fund Deposits. The proposed changes would not affect 
NSCC's operations or the rights and obligations of membership. As such, 
NSCC believes the proposed rule changes would not have any impact on 
competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    NSCC has not received or solicited any written comments relating to 
this proposal. If any written comments are received, they will be 
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
Commission's Division of Trading and Markets at 
[email protected] or 202-551-5777.
    NSCC reserves the right not to respond to any comments received.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which

[[Page 43364]]

the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSCC-2022-009 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-2022-009. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of NSCC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.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-2022-009 and should be submitted on 
or before August 10, 2022.
---------------------------------------------------------------------------

    \55\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-15451 Filed 7-19-22; 8:45 am]
BILLING CODE 8011-01-P