Document ID: SEC-2013-0696-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Eliminate the Offset of Its Obligations With Institutional Delivery Transactions That Settle at The Depository Trust Company for the Purpose of Calculating Its Clearing Fund Under Procedure XV of Its Rules&Procedures
Posted Date: 2013-04-10T04:00Z

[Federal Register Volume 78, Number 69 (Wednesday, April 10, 2013)]
[Notices]
[Pages 21460-21464]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08307]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69302; File No. SR-NSCC-2012-10]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Eliminate the 
Offset of Its Obligations With Institutional Delivery Transactions That 
Settle at The Depository Trust Company for the Purpose of Calculating 
Its Clearing Fund Under Procedure XV of Its Rules & Procedures

April 4, 2013.

I. Introduction

    On December 17, 2012, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2012-10 (``Proposed Rule 
Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'')\1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule 
Change was published in the Federal Register on January 4, 2013.\3\ The 
Commission extended the period of review of the Proposed Rule Change on 
February 5, 2013.\4\ The Commission received two comment letters to the 
Proposed Rule Change from one commenter,\5\ as well as two responses 
from NSCC to the comment letters.\6\ This order approves the Proposed 
Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Release No. 34-68549 (Dec. 28, 2012), 78 FR 792 (Jan. 4, 
2013). NSCC also filed an advance notice pursuant to Section 
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act 
of 2010 relating to these changes. Release No. 34-68621 (Jan. 10, 
2013), 78 FR 3960 (Jan. 17, 2013).
    \4\ Release No. 34-68829 (Feb. 5, 2013), 78 FR 9751 (Feb. 11, 
2013).
    \5\ Comment Letter from Lek Securities Corporation dated January 
25, 2013 (``First Lek Letter'') (http://sec.gov/comments/sr-nscc-2012-810/nscc2012810-1.pdf), and Comment Letter from Lek Securities 
Corporation dated March 18, 2013 (``Second Lek Letter'') (http://sec.gov/comments/sr-nscc-2012-810/nscc2012810-3.pdf), (collectively, 
the ``Lek Letters'').
    \6\ Response Letter from NSCC dated February 22, 2013 (``First 
NSCC Response'') (http://sec.gov/comments/sr-nscc-2012-810/nscc2012810-2.pdf), and Response Letter from NSCC dated March 21, 
2013 (``Second NSCC Response'') (http://sec.gov/comments/sr-nscc-2012-810/nscc2012810-4.pdf), (collectively, the ``NSCC Responses'').
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II. Description

    NSCC filed the Proposed Rule Change to permit it to make rule 
changes to its Rules and Procedures (``Rules'') designed to eliminate 
the offset of NSCC obligations with institutional delivery (``ID'') 
transactions that settle at The Depository Trust Company (``DTC'') for 
the purpose of calculating the NSCC clearing fund (``Clearing Fund'') 
under Procedure XV of its Rules, as discussed below.

A. ID Offset

    NSCC maintains a Clearing Fund to have on deposit assets sufficient 
to satisfy losses that may otherwise be incurred by NSCC as the result 
of the default of an NSCC member (``Member'') and the resulting 
closeout of that Member's unsettled positions under NSCC's trade 
guaranty. Each Member is required to contribute to the Clearing Fund 
pursuant to a formula calculated daily. The Clearing Fund formula 
accounts for a variety of risk factors through the application of a 
number of components, including Value-at-Risk (``VaR'') \7\ and Market 
Maker Domination (``MMDOM'').\8\
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    \7\ The VaR component of the Clearing Fund calculation is a core 
component of the formula and is designed to calculate the amount of 
money that may be lost on a portfolio over a given period of time 
that is assumed necessary to liquidate the portfolio, within a given 
level of confidence. See Release No. 34-68549 (Dec. 28, 2012), 78 FR 
792 (Jan. 4, 2013).
    \8\ The MMDOM component of the Clearing Fund calculation is 
charged to market makers or firms that clear for them. In 
calculating the MMDOM, if the sum of the absolute values of net 
unsettled positions in a security for which the firm in question 
makes a market is greater than that firm's excess net capital, NSCC 
may then charge the firm an amount equal to such excess or the sum 
of each of the absolute values of the affected net unsettled 
positions, or a combination of both. MMDOM operates to identify 
concentration within a given CUSIP. See Release No. 34-68549 (Dec. 
28, 2012), 78 FR 792 (Jan. 4, 2013).
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    NSCC currently calculates the VaR and MMDOM components of a 
Member's Clearing Fund required deposit after allowing for a Member's 
net unsettled NSCC positions in a particular CUSIP to be offset by any 
pending ID transactions settling at DTC in the same CUSIP, which have 
been confirmed and/or affirmed through an institutional delivery system 
acceptable to NSCC (``ID Offset'').\9\ ID Offset is based on the 
assumption that in the event of a Member's insolvency NSCC will be able 
to close out any trade for which there is a corresponding ID 
transaction settling at DTC by completing that ID transaction.\10\
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    \9\ For purposes of the ID Offset, NSCC includes ID transactions 
that are confirmed and/or affirmed on trade date, as well as ID 
transactions affirmed one day after trade date and remain affirmed 
through settlement date. See Release No. 34-68549 (Dec. 28, 2012), 
78 FR 792 (Jan. 4, 2013).
    \10\ ID transactions are included in the ID Offset only if they 
are on the opposite side of the market from the Member's net NSCC 
position (i.e., only if they reduce the net position). See Release 
No. 34-68549 (Dec. 28, 2012), 78 FR 792 (Jan. 4, 2013).
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B. Potential Inability To Complete ID Transactions

    Generally, when NSCC ceases to act for a Member, it is obligated, 
for those transactions that it has guaranteed, to pay for deliveries 
made by non-defaulting Members that are due to the failed Member on the 
day they are due. If NSCC is unable to complete the ID transactions as 
contemplated by the current Clearing Fund calculation, then NSCC may 
need to liquidate a portfolio that could be substantially different 
than the portfolio for which NSCC collected its Clearing Fund, leaving 
NSCC potentially under-collateralized and exposed to market risk.
    A defaulting Member's pending ID transactions may not be completed 
for a number of reasons. Completion of an ID transaction by its 
institutional counterparty is voluntary because that counterparty is 
not a Member, which means it is not bound by NSCC's Rules and is not 
party to any legally binding contract with NSCC that requires it or its 
custodian to complete the transaction. Moreover, based on news that a 
Member may be in distress or insolvent, the institutional counterparty 
or its investment adviser may take immediate market action with respect 
to

[[Page 21461]]

the ID transaction, in order to reduce its market risk, which 
effectively eliminates the option for NSCC to complete the 
transactions. Finally, ID transactions settle trade-by-trade between 
the executing broker and the custodian; the netted ID positions used to 
offset the NSCC position could be comprised of thousands of individual 
trades with hundreds of different counterparties. In the event of a 
Member default, it could be time consuming for NSCC to contact the 
counterparties individually to get their agreement to complete the ID 
transactions. Even if NSCC were to get all of the counterparties to 
agree to complete the ID transactions, this could delay the prompt 
closeout of the defaulter's open positions and possibly expose NSCC to 
additional market risk in excess of the Clearing Fund.
    Due to the risk that, in the event it ceases to act for a Member 
with pending ID transactions, NSCC may be unable to complete the 
pending ID transactions in the timeframe contemplated by its current 
Clearing Fund calculations and, as a result, may have insufficient 
margin in its Clearing Fund, as described above, NSCC will eliminate 
the ID Offset calculation from the VaR and MMDOM components of a 
Member's Clearing Fund requirement deposit.

C. Implementation Schedule

    In order to mitigate the impact of this rule change on its Members, 
NSCC will implement the changes set forth in the Proposed Rule Change 
over an 18-month period. On a date no earlier than 10 days following 
notice to Members by Important Notice (``Initial Implementation 
Date''), NSCC will eliminate ID Offset from ID transactions that have 
only been confirmed, but have not yet been affirmed. Beginning on a 
date approximately 12 months from the Initial Implementation Date, and 
no earlier than 10 days following notice to Members by Important 
Notice, NSCC will eliminate from ID Offset all affirmed ID transactions 
that have reached settlement date at the time the Clearing Fund 
calculations are run. Three months later, or approximately 15 months 
following the Initial Implementation Date, and on a date no earlier 
than 10 days following notice to Members by Important Notice, NSCC will 
eliminate from ID Offset all affirmed ID transactions that have reached 
either settlement date or the day prior to settlement date. Finally, on 
a date approximately 18 months following the Initial Implementation 
Date, and no earlier than 10 days following notice to Members by 
Important Notice, NSCC will eliminate ID Offset entirely for all ID 
transactions. Members will be advised of each proposed implementation 
date through issuance of NSCC Important Notices, which are publicly 
available at www.dtcc.com.

III. Comments

    The Commission received two comment letters to the Proposed Rule 
Change from a single commenter,\11\ and two responses from NSCC to the 
comment letters.\12\
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    \11\ See Lek Letters, supra note 5.
    \12\ See NSCC Responses, supra note 6.
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    The commenter's arguments opposing NSCC's proposal generally fall 
into two categories: (1) Those that challenge a premise for, or the 
decision-making process with respect to, the Proposed Rule Change; and 
(2) those that identify potential ramifications of the Proposed Rule 
Change.\13\ Each of the arguments, as well as NSCC's responses, are 
discussed in more detail below.
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    \13\ See Lek Letters, supra note 5. The First Lek Letter also 
argued that broker-dealers should be permitted to use customer funds 
to meet margin requirements derived from customer positions. See 
First Lek Letter, supra note 5. Because that argument addresses a 
Commission requirement and not an NSCC requirement, it is outside 
the scope of this Proposed Rule Change.
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    The commenter argues that it is a reasonable assumption that most 
ID transactions will be completed because institutional customers are 
reliable and creditworthy, so NSCC should not assume for purposes of 
the Proposed Rule Change that all ID transactions will not be 
completed.\14\
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    \14\ See First Lek Letter, supra note 5.
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    NSCC responded that there is no guarantee that any pending ID 
transaction will be completed because there is no privity of contract 
between NSCC and the non-member institutional counterparties to the ID 
transactions,\15\ which the commenter conceded.\16\ Therefore, 
notwithstanding institutional customers' past practices, NSCC argues 
that there is no contractual obligation with NSCC that ID transactions 
be completed; as a result, the assumption that NSCC will be able to 
close out defaulting member trades for which there is a corresponding 
ID transaction that will settle at DTC is wrong.\17\
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    \15\ See NSCC Responses, supra note 6; see also Release No. 34-
68549 (Dec. 28, 2012), 78 FR 792 (Jan. 4, 2013).
    \16\ See Second Lek Letter, supra note 5 (``NSCC is however 
correct that there is lack of privity of contract between NSCC and 
the institutional counterparty, and that if left unaddressed NSCC 
would not be able to complete the pending ID transactions. We 
applaud NSCC for identifying this concern.''); see also First Lek 
Letter, supra note 5 (``We do concede that one, or maybe even two, 
of an agency broker's customers might reneg [sic] on their losing 
trades * * * and as a result the broker would be stuck with the 
trades and lose money covering them.'').
    \17\ See NSCC Responses, supra note 6; see also Release No. 34-
68549 (Dec. 28, 2012), 78 FR 792 (Jan. 4, 2013).
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    The commenter claims that NSCC currently collects sufficient 
margin, as NSCC has never had to use the Clearing Fund deposits of a 
non-defaulting Member, nor has it ever suffered a loss due to 
insufficient margin.\18\ Because NSCC's current margin requirements are 
adequately calculated, the ID Offset should remain.\19\
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    \18\ See First Lek Letter, supra note 5.
    \19\ Id.
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    In response, NSCC stated, and to which the commenter agreed,\20\ 
that past events may not be adequate indicators of future risks when 
calculating its margin requirements, particularly in light of recent 
financial market disruptions, changing trading patterns, and new 
trading technologies.\21\ Additionally, by allowing the ID Offset, NSCC 
maintains that its current Clearing Fund calculation fails to account 
for the risk that NSCC will not be able to settle pending ID trades, 
and that therefore the calculation should be adjusted to eliminate this 
known risk, irrespective of whether the current margin has been 
sufficient.\22\
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    \20\ See Second Lek Letter, supra note 5 (``We * * * agree that 
NSCC should not necessarily rely on past events as indicators of 
future risks and that high frequency trading and computerized 
algorithms have introduced additional risk into the market.'').
    \21\ See First NSCC Response, supra note 6.
    \22\ Id.
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    The commenter argues that agency broker-dealers are less risky than 
Members engaged in proprietary trading for a number of reasons, 
including that agency broker-dealers do not trade on margin, cannot 
assume short positions, and cannot write options.\23\ As a result, the 
commenter argues that agency broker-dealers should not be required to 
meet the same margin requirements as Members engaged in proprietary 
trading.\24\
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    \23\ See First Lek Letter, supra note 5.
    \24\ Id.
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    NSCC responds that agency broker-dealer firms, along with other 
firms, are trading in greater volume and frequency and are employing 
riskier trading techniques, like high frequency trading, than they have 
historically.\25\ As a result, NSCC believes that all firms, including 
agency broker-dealers, present a greater risk of failure now than they 
have historically.\26\
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    \25\ See First NSCC Response, supra note 6. NSCC noted that a 
technology-related trading disruption that occurred in August 2012 
was generated by an agency broker-dealer. Id.
    \26\ Id.

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[[Page 21462]]

    Citing the requirement in Section 17A(b)(3)(C) of the Act that the 
rules of a registered clearing agency should assure a fair 
representation of its members and participants in the selection of its 
directors and administration of its affairs, the commenter suggests 
that the Depository Trust and Clearing Corporation (``DTCC'') \27\ 
Board may not fairly represent NSCC's independent, agency broker-dealer 
Members, given that there is not one representative on the board from a 
traditional, non-bank affiliated brokerage firm; although, the 
commenter notes that it is not suggesting that the DTCC Board's 
composition is a direct violation of 17A(b)(3)(C) of the Act.\28\ As 
discussed below, NSCC has noted that it took various steps to discuss 
the proposal with its Members and seek input from Members.
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    \27\ NSCC is a wholly owned subsidiary of DTCC. About DTCC: 
NSCC, http://dtcc.com/about/subs/nscc.php (last visited Apr. 2, 
2013).
    \28\ See First Lek Letter, supra note 5 (``[W]e are not 
suggesting that the Board's current makeup directly violates 
[Section 17A(b)(3)(C) of the Exchange Act] * * *.''); see also 15 
U.S.C. 78q-1(b)(3)(C).
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    The commenter argues that the proposal has a disparate, negative 
impact on agency broker-dealers not only because such firms are less 
risky and, therefore, should not require as much margin, as discussed 
above, but also because the elimination of the ID Offset will likely 
increase Clearing Fund margin requirements, increases that independent 
broker-dealers (i.e., non-bank affiliated firms) may be unable to meet 
due to funding restraints, which may force such broker-dealers out of 
business, possibly reducing competition in the industry. The commenter 
has also stated that the proposal may have a negative impact on 
customers of such broker-dealers.\29\
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    \29\ See Lek Letters, supra note 5.
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    NSCC responded that the elimination of the ID Offset is equally 
applied to its Members, and that the ID Offset provides an unfair and 
disproportionate advantage currently enjoyed by Members who have ID 
transactions to offset; therefore, the proposal actually ``levels the 
playing field,'' with respect to calculating the margin collected for 
the Clearing Fund.\30\ Additionally, NSCC acknowledges that the 
proposal to eliminate ID Offsets will likely increase the Clearing Fund 
requirements of certain Members.\31\ However, to mitigate that effect, 
NSCC explains that it performed an impact study of the proposal, shared 
the results of the study with impacted Members, and provided 
opportunities for those Members to discuss, prepare for, and further 
mitigate the impact, most specifically through a working group that, 
ultimately, developed an 18-month implementation timeframe, as outlined 
in the notice of the Proposed Rule Change.\32\ NSCC has also noted that 
NSCC Relationship Management and Enterprise Risk Management staff met 
with Members that would have experienced a change to their clearing 
fund requirement of greater than 25%, and other impacted Members were 
invited to contact their NSCC Relationship Managers to schedule 
meetings with HSCC staff. Furthermore, NSCC notes that Members who are 
unable to meet its Clearing Fund requirements are not necessarily 
forced out of business; rather, such firms could choose to clear their 
transactions through Members who continue to meet the requirements, as 
some agency broker-dealers currently do.\33\ Finally, NSCC argues that 
given the important risk mitigating benefits of eliminating the ID 
Offset, NSCC believes the possible, unintended impact on competition 
should not be considered unreasonable or inappropriate. NSCC also has 
stated that the rule change will improve the safety and soundness of 
the U.S. capital markets, generally.\34\
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    \30\ See First NSCC Response, supra note 6.
    \31\ See NSCC Responses, supra note 6.
    \32\ See First NSCC Response, supra note 6; see also Release No. 
34-68549 (Dec. 28, 2012), 78 FR 792 (Jan. 4, 2013).
    \33\ See First NSCC Response, supra note 6.
    \34\ See First NSCC Response, supra note 6.
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    The commenter states that a viable alternative to the proposal to 
eliminate the ID Offset exists, in that NSCC could serve as a central 
counterparty (``CCP'') for ID transactions (``CCP Alternative''),\35\ 
as it does for other transactions.\36\ According to the commenter, this 
would alleviate NSCC's concern that it may not be able to close out 
defaulting member trades for which there is a corresponding ID 
transaction that will settle at DTC with the corresponding ID 
transaction.\37\ Furthermore, the commenter claims that NSCC staff 
believes that the CCP Alternative is viable and would satisfy NSCC 
concerns with regard to ID Offsets, but it is not supported by NSCC's 
senior management, who may have ulterior motives in seeing ID Offsets 
eliminated.\38\
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    \35\ See Second Lek Letter, supra note 5.
    \36\ Among other things, NSCC provides CCP services and 
guarantees completion for certain transactions, but not ID 
transactions. See About DTCC: NSCC, supra note 27.
    \37\ See Lek Letters, supra note 5.
    \38\ See Second Lek Letter, supra note 5.
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    NSCC counters, generally, that alternatives to the proposal were 
explored, particularly through the working group mentioned above, but 
no viable options exist.\39\ More specifically, NSCC argues that the 
CCP Alternative is not practical because the institutional 
counterparties to ID trades are not NSCC members, and thus NSCC would 
have to voluntarily guarantee uncollateralized ID trades without 
collecting margin to insulate NSCC from a default of a counterparty, 
which would not resolve the market risk that ID Offsets present and 
NSCC seeks to eliminate with its proposal.\40\ Additionally, even if 
the CCP Alternative were to eliminate the ID Offset market risk, NSCC 
claims that implementing the CCP Alternative would require a 
significant change to the current securities market structure.\41\ 
Finally, NSCC asserts that the CCP Alternative is not viable.\42\
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    \39\ See First NSCC Response, supra note 6.
    \40\ See Second NSCC Response, supra note 6 (``The [CCP 
Alternative] would require the buy-side of the market to 
contractually agree to settle its transactions at NSCC, whereby NSCC 
would essentially provide a central counterparty guarantee to the 
buy-side of those trades on an uncollateralized basis, without 
collecting margin that would protect it and its membership from the 
default of those buy-side parties.'').
    \41\ Id.
    \42\ Id.
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IV. Discussion

    In its assessment of the Proposed Rule Change for consistency with 
the Act, the Commission carefully considered the comments and responses 
it received and the information provided in the Proposed Rule Change 
itself. After an extended review, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
the applicable rules and regulations thereunder, as discussed 
below.\43\
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    \43\ In approving the Proposed Rule Change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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    Section 17A(b)(3)(F) of the Act requires that, among other things, 
``[t]he rules of the clearing agency are designed to promote the prompt 
and accurate clearance and settlement of securities transactions and * 
* * to assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.'' \44\
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    \44\ 15 U.S.C. 78q-1(b)(3)(F).
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    As a CCP, NSCC occupies an important role in the securities 
settlement system by interposing itself between counterparties to 
financial transactions, thereby reducing certain risks faced by Members 
and contributing to global financial stability. In this role, however, 
NSCC is

[[Page 21463]]

necessarily subject to certain risks in the event of the default of a 
Member.
    Here, NSCC's proposal to eliminate the ID Offset, as described 
above, is designed to help mitigate the risk that NSCC will be under-
collateralized if it ceases to act for a defaulting Member and is 
unable to complete the offsetting ID transactions in the time currently 
contemplated by its Clearing Fund calculation. As such, the Commission 
believes that NSCC's proposal to eliminate ID Offsets should help 
further promote the prompt and accurate clearance and settlement of 
securities transactions, and assure the safeguarding of securities and 
funds for which NSCC is responsible.
    Furthermore, Commission Rule 17Ad-22(b)(1) regarding measurement 
and management of credit exposure,\45\ adopted as part of the Clearing 
Agency Standards,\46\ requires a CCP to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
measure its credit exposures to its participants at least once a day 
and limit its exposures to potential losses from defaults by its 
participants under normal market conditions so that the operations of 
the CCP would not be disrupted and non-defaulting participants would 
not be exposed to losses that they cannot anticipate or control.\47\
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    \45\ 17 CFR 240.17Ad-22(b)(1).
    \46\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 
2012).
    \47\ 17 CFR 240.17Ad-22(b)(1).
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    Here, as described in detail above, NSCC's proposal to eliminate ID 
Offsets should help to limit its exposure, as well as non-defaulting 
members' exposure, to potential losses from a defaulting Member, while 
minimizing disruption to its CCP operations, by more accurately 
reflecting its risks in the calculation of its Clearing Fund margin. As 
discussed above, NSCC's calculation of its Clearing Fund margin will be 
more accurate in that it will not include an assumption of trade 
closeouts following a Member insolvency with respect to trades for 
which there is a corresponding ID transaction.
    Finally, Commission Rules 17Ad-22(d)(4) regarding identification 
and mitigation of operational risk,\48\ and 17Ad-22(d)(11) regarding 
default procedures,\49\ also both adopted as part of the Clearing 
Agency Standards,\50\ require that registered clearing agencies 
``establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable: * * * Identify 
sources of operational risk and minimize them through the development 
of appropriate systems, controls, and procedures * * * '',\51\ and `` * 
* * establish default procedures that ensure that the clearing agency 
can take timely action to contain losses and liquidity pressures and to 
continue meeting its obligations in the event of a participant 
default,'' \52\ respectively.
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    \48\ 17 CFR 240.17Ad-22(d)(4).
    \49\ 17 CFR 240.17Ad-22(d)(11).
    \50\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 
2012).
    \51\ 17 CFR 240.17Ad-22(d)(4).
    \52\ 17 CFR 240.17Ad-22(d)(11).
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    Here, as described in detail above, the elimination of ID Offsets 
should help NSCC better minimize settlement risks and better ensure 
that it can contain losses and liquidity pressures, and meet its 
obligations in a timely fashion, by more accurately accounting for 
those risks in its Clearing Fund calculation that is designed to 
satisfy potential losses in a timely manner.
    After specifically considering each of the commenter's claims, as 
discussed below, the Commission maintains its belief that the Proposed 
Rule Change is consistent with the requirements of the Act and the 
applicable rules and regulations thereunder, as discussed above.
    The Commission understands that institutional counterparties to ID 
transactions are not NSCC members and, therefore, maintain no privity 
of contract with NSCC regarding ID trades.\53\ Since there is no 
contractual obligation with NSCC that ID transactions be completed, the 
assumption that NSCC may not be able to close out defaulting member 
trades for which there is a corresponding ID transaction that will 
settle at DTC is correct.
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    \53\ See NSCC Responses, supra note 6, and see Second Lek 
Letter, supra note 5.
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    Given the risk that NSCC may not be able to settle ID trades, as 
discussed above, NSCC may be collecting insufficient margin, regardless 
of past needs, potentially leaving it under-collateralized if a Member 
defaults. The Commission believes that the Proposed Rule Change 
furthers NSCC's compliance with the requirements of Section 
17A(b)(3)(F)\54\ of the Act, as well as Rules 17Ad-22(b)(1),\55\ 17Ad-
22(d)(4),\56\ and 17Ad-22(d)(11),\57\ as described above.
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    \54\ 15 U.S.C. 78q-1(b)(3)(F).
    \55\ 17 CFR 240.17Ad-22(b)(1).
    \56\ 17 CFR 240.17Ad-22(d)(4).
    \57\ 17 CFR 240.17Ad-22(d)(11).
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    The Commission believes that agency broker-dealer firms are not 
riskless and those Members could present serious risks to NSCC, as 
demonstrated by the significant market events involving an NSCC Member 
in August 2012, which both NSCC and the commenter acknowledge.\58\ 
Therefore, as noted above, the Commission believes that the elimination 
of the ID Offset, which would mitigate a known risk, as discussed 
above, furthers NSCC's compliance with Section 17A(b)(3)(F) of the 
Act,\59\ as well as Rules 17Ad-22(b)(1),\60\ 17Ad-22(d)(4),\61\ and 
17Ad-22(d)(11),\62\ as discussed above.
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    \58\ See First NSCC Response, supra note 6, and see Second Lek 
Letter, supra note 5.
    \59\ 15 U.S.C. 78q-1(b)(3)(F).
    \60\ 17 CFR 240.17Ad-22(b)(1).
    \61\ 17 CFR 240.17Ad-22(d)(4).
    \62\ 17 CFR 240.17Ad-22(d)(11).
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    Though the commenter did not suggest that DTCC Board's composition 
is a direct violation of 17A(b)(3)(C) of the Act,\63\ the Commission 
notes that fair representation can be achieved through multiple 
channels, including exposing Members to proposed rule changes in order 
for Members to have an opportunity to express their particular needs or 
concerns.\64\ Here, before filing the proposal with the Commission, 
where the proposal became available for public comment,\65\ NSCC: 
notified its Members of its intent to file; completed a study on the 
proposal's impact; provided impacted Members with direct feedback; 
convened a working group of impacted Members to address ways of 
mitigating the proposals impact; and incorporated an 18-month 
implementation schedule into the proposal--a direct result of the 
working group.\66\ The Commission believes that in the circumstances of 
the Proposed Rule Change, these processes have provided NSCC Members 
adequate opportunity to fairly represent themselves in the development 
of the proposal.
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    \63\ See First Lek Letter, supra note 5 (``[W]e are not 
suggesting that the Board's current makeup directly violations 
[Section 17A(b)(3)(C) of the Exchange Act] * * * .''), and see 15 
U.S.C. 78q-1(b)(3)(C).
    \64\ See Release No. 34-16900 (June 17, 1980), 45 FR 41920 (June 
23, 1980).
    \65\ Release No. 34-68549 (Dec. 28, 2012), 78 FR 792 (Jan. 4, 
2013).
    \66\ See NSCC Reponses, supra note 6.
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    By eliminating the ID Offset, which the Commission believes applies 
universally to all Members and which would be consistent with Section 
17A(b)(3)(F) of the Act,\67\ as well as Rules 17Ad-22(b)(1),\68\ 17Ad-
22(d)(4),\69\ and 17Ad-22(d)(11),\70\ as discussed above, there could 
be a resulting increase in NSCC's Clearing Fund requirement, as both 
NSCC and the

[[Page 21464]]

commenter acknowledge,\71\ which may have a detrimental impact on 
certain Members and possibly competition overall. However, the 
Commission believes NSCC has taken adequate steps to engage Members 
impacted by the increase and mitigate the effect of the increase, as 
demonstrated by the impact studies and the working group that NSCC 
convened that resulted in the 18-month implementation scheduled.\72\ 
Additionally, the Commission believes that while there could be a 
redistribution of business for agency broker-dealers,\73\ agency 
broker-dealers impacted by the Proposed Rule Change could seek 
alternative arrangements, such as moving the applicable portion of the 
impacted business to or through a continuing Member, as NSCC suggests 
and as is currently done by some firms.\74\ The Commission also 
acknowledges that while the proposal may have an effect on customers, a 
more accurate reflection of risks in the calculation of Clearing Fund 
margin, however, could benefit customers through reducing risks to 
NSCC.
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    \67\ 15 U.S.C. 78q-1(b)(3)(F).
    \68\ 17 CFR 240.17Ad-22(b)(1).
    \69\ 17 CFR 240.17Ad-22(d)(4).
    \70\ 17 CFR 240.17Ad-22(d)(11).
    \71\ See First Lek Letter, supra note 5, and see NSCC Responses, 
supra note 6.
    \72\ See NSCC Responses, supra note 6.
    \73\ See Lek Letters, supra note 5.
    \74\ See First NSCC response, supra note 6. The Commission notes 
that it did not receive comments from any other firms potentially 
impacted by the Proposed Rule Change.
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    NSCC has not proposed the CCP Alternative discussed above as a 
proposed rule change, and thus the CCP Alternative is outside the scope 
of this Proposed Rule Change. Nonetheless, in considering the 
consistency of the Proposed Rule Change with the requirements of the 
Act and the applicable rules and regulations thereunder, the Commission 
acknowledges that the CCP Alternative does not appear practical for 
NSCC at the current time because, as NSCC has pointed out, the 
institutional counterparties to ID trades are not NSCC members, and 
thus, absent new membership for these counterparties, NSCC would have 
to voluntarily guarantee uncollateralized ID trades without collecting 
margin to insulate NSCC from a default of a counterparty, which would 
not resolve the market risk that ID Offsets present and NSCC seeks to 
eliminate through the Proposed Rule Change. Furthermore, even if the 
CCP Alternative did resolve the market risk that the Proposed Rule 
Change is intended to address, the CCP Alternative does not appear to 
be an immediately viable option for NSCC, as it would likely require 
potentially complicated changes to the current clearance and settlement 
structure.\75\
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    \75\ See Second NSCC Response, supra note 6.
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V. Conclusion

    On the basis of the foregoing, the Commission finds the Proposed 
Rule Change consistent with the requirements of the Act, particularly 
with the requirements of Section 17A of the Act,\76\ and the rules and 
regulations thereunder.
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    \76\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\77\ that the proposed rule change SR-NSCC-2012-10 be and hereby is 
APPROVED as of the date of this order or the date of the ``Notice of 
Filing No Objection to Advance Notice Filing to Eliminate the Offset of 
[NSCC's] Obligations with Institutional Delivery Transactions that 
Settle at The Depository Trust Company for the Purpose of Calculating 
Its Clearing Fund Under Procedure XV of Its Rules & Procedures'' (File 
No. SR-NSCC-2012-810),\78\ whichever is later.
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    \77\ 15 U.S.C. 78s(b)(2).
    \78\ Release No. 34-69301

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\79\
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    \79\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08307 Filed 4-9-13; 8:45 am]
BILLING CODE 8011-01-P