Document ID: SEC-2023-1151-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2023-10-04T04:00Z

[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68777-68784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21936]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98589; File No. SR-NSCC-2023-009]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change Relating to the 
Schedule of Haircuts for Eligible Clearing Fund Securities

September 28, 2023.
    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 September 22, 2023, 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 primarily prepared by the clearing 
agency. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to NSCC's Rules 
& Procedures (``Rules'') \3\ in order to modify the schedule of 
haircuts for Eligible Clearing Fund Securities and remove it from 
Procedure XV of the Rules (``Procedure XV''), and make other clarifying 
changes, as described in greater detail below.
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, available at www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
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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 modify the schedule of haircuts for Eligible 
Clearing Fund Securities, and to remove it and the related 
concentration limits from Procedure XV, and make other clarifying 
changes, as described in greater detail below.
Background
    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.\4\ The Required Fund Deposit serves as each 
member's margin.
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    \4\ 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).
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    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'').\5\ The aggregate of all 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. The Clearing Fund 
reduces the risk that NSCC would need to mutualize any losses among 
non-defaulting members during the liquidation process.
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    \5\ The Rules identify when NSCC may cease to act for a member 
and the types of actions NSCC may take. For example, NSCC may 
suspend a firm's membership with NSCC or prohibit or limit a 
member's access to NSCC's services in the event that member defaults 
on a financial or other obligation to NSCC. See Rule 46 
(Restrictions on Access to Services), supra note 3.
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    Under Rule 4 (Clearing Fund), members are required to make deposits 
to the Clearing Fund, with the amount of each member's Required Fund 
Deposit being determined by NSCC in accordance with Rule 4. A member 
may satisfy its Required Fund Deposit with cash or an open account 
indebtedness secured by Eligible Clearing Fund Securities.\6\ Eligible 
Clearing Fund Securities, comprised of certain agency, mortgage-backed, 
and Treasury securities, are valued based on the prior Business Day's 
closing market price, less a haircut, and may be subject to a 
concentration limit.\7\ Haircuts are used to protect NSCC and its 
members from price fluctuations, i.e., if NSCC is required to liquidate 
collateral of an insolvent member and such collateral is worth less at 
the time of liquidation than when it is pledged to NSCC. Concentration 
limits are intended to reduce NSCC's risk by limiting the percentage of 
certain types of Eligible Clearing Fund Securities pledged by members 
to secure the Clearing Fund deposits. This is because when a member's 
portfolio contains large net unsettled positions in a particular group 
of securities with a similar risk profile or in a particular asset 
type, such securities could present additional risk to NSCC.
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    \6\ See Rule 4, Section 1, supra note 3.
    \7\ See Rule 1 (Definitions) for applicable definitions, 
including Eligible Clearing Fund Securities and its components, 
which are Eligible Clearing Fund Agency Securities, Eligible 
Clearing Fund Mortgage-Backed Securities, and Eligible Clearing Fund 
Treasury Securities. Supra note 3.
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    Currently, collateral haircuts applicable to relevant security 
types and remaining maturity terms are specified as fixed percentages 
in Section III.(A) of Procedure XV (``Section III.(A)'').\8\ The 
sufficiency of collateral haircuts is evaluated through use of back-
tests, stress-tests and market observations. To ensure the sufficiency 
of the collateral haircuts, a backtesting analysis of members' 
collateral deposits is conducted daily, and summary reviews are 
completed quarterly, each by the NSCC market risk group pursuant to 
NSCC's internal market risk management policies and procedures. NSCC 
performs daily backtesting of collateral by comparing the collateral 
haircut for each member in simulated liquidations with the member's 
actual collateral held on deposit at NSCC. Any exceptions noted are 
escalated to management daily to assess the root cause and determine 
whether further analysis and/or review would be appropriate. 
Specifically, if NSCC determines that a particular security may present 
inherent volatility and/or liquidity risks that could likely result in 
an erosion in the value of the security exceeding the applicable 
collateral

[[Page 68778]]

haircut, ad hoc reviews may be conducted by risk management pursuant to 
NSCC's internal market risk management procedures. On a quarterly 
basis, NSCC reviews and identifies instances where the simulated losses 
from available historical stress testing scenario dates have exceeded 
the collateral haircut values. In addition, each quarter, NSCC reviews 
the composition of the Eligible Clearing Fund Securities that members 
have pledged to secure their Required Fund Deposits in order to assess 
the sufficiency of the collateral haircuts applied and whether any 
haircut changes would be needed.
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    \8\ See Section III.(A) of Procedure XV, supra note 3. Section 
III.(A) was last modified in 2011 in order to conform the haircuts 
to requirements of NSCC's lenders under its credit facilities. See 
Securities Exchange Act Release No. 64487 (May 13, 2011), 76 FR 
29019 (May 19, 2011) (SR-NSCC-2011-02).
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    In addition to collateral haircuts, NSCC applies concentration 
limits to certain Eligible Clearing Fund Securities. Currently, the 
concentration limits applicable to certain Eligible Clearing Fund 
Securities are specified in subsections (a) and (b) of Section II.(A)1. 
of Procedure XV (``Section II.(A)1.'').\9\ Specifically, subsection (a) 
provides any deposits of Eligible Clearing Fund Agency Securities or 
Eligible Clearing Fund Mortgage-Backed Securities in excess of 25 
percent of a member's Required Fund Deposit will be subject to a 
haircut that is twice the amount of the percentage noted in Section 
III.(A). In addition, footnote 7 of subsection (a) of Section II.(A)1. 
provides that a member that is an Agency may not pledge Eligible 
Clearing Fund Agency Securities of which it is the issuer. Footnote 8 
of subsection (a) provides that with regard to a member that pledges 
Eligible Clearing Fund Mortgage-Backed Securities of which it is the 
issuer, such collateral will be subject to a premium haircut as 
specified in Section III.(A). Subsection (b) of Section II.(A)1. 
provides that no more than 20 percent of a member's Required Fund 
Deposit may be in the form of Eligible Clearing Fund Agency Securities 
that are of a single issuer.
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    \9\ See Section II.(A)1. of Procedure XV, supra note 3.
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    Changes to the collateral haircuts and concentration limits are 
currently subject to NSCC's internal governance process and would 
remain so with respect to the haircut schedule changes made in 
accordance with this proposal. If NSCC determines that, based on the 
analyses that it performs, there is insufficient/excessive collateral 
haircut/concentration due to an identifiable cause that affected 
multiple members and such cause would likely persist based on NSCC's 
assessment of market conditions, such outcome or result could cause 
NSCC to amend the haircuts/concentration limits in the haircut 
schedule. If NSCC determines that a change to the haircut schedule is 
warranted, its market risk group would document the recommendation and 
rationale for the change at the time of such determination and obtain 
approval from an executive director or above with a notice to the risk 
management committee, in accordance with NSCC's internal market risk 
management policies and procedures. Before making adjustments to the 
haircut schedule, NSCC measures the potential impact of such 
adjustments to ensure any impact is both necessary and appropriate.
    Through its review, NSCC has observed that under volatile market 
conditions with elevated frequency and magnitude of securities price 
movements, the collateral value of Eligible Clearing Fund Securities 
may shift in a relatively short period of time and the current haircuts 
may not sufficiently account for the change in value. When the erosion 
in the value of the Eligible Clearing Fund Securities exceeds the 
relevant haircuts, NSCC is exposed to increased risk of potential 
losses associated with liquidating a member's portfolio in the event of 
a member default when the defaulting member's own margin is 
insufficient to satisfy losses to NSCC caused by the liquidation of 
that member's portfolio. Similarly, when a member's portfolio contains 
large net unsettled positions in a particular group of securities with 
a similar risk profile or in a particular asset type, such securities 
could present additional risk to NSCC. The additional risk exposures 
associated with liquidating a member's portfolio in the event of a 
member default could lead to an increase in the likelihood that NSCC 
would need to mutualize losses among non-defaulting members during the 
liquidation process. However, any changes to the haircuts and/or 
concentration limits currently requires a proposed rule change to be 
filed with the Commission. In order to provide NSCC with more 
flexibility in adjusting the haircuts and concentration limits so NSCC 
can respond to changing market conditions more promptly in order to 
mitigate the additional risk exposure, NSCC is proposing to remove 
Section III.(A) and concentration limits from the Rules, and to publish 
the haircuts and concentration limits in a haircut schedule on NSCC's 
website.
    Specifically, NSCC is proposing to delete subsections (a) and (b) 
of Section II.(A)1., and delete Section III of Procedure XV. Currently, 
subsections (a) and (b) of Section II.(A)1. set out certain 
concentration limits for Eligible Clearing Fund Agency Securities and 
Eligible Clearing Fund Mortgage-Backed Securities. Subsection (a) 
provides that any deposits of Eligible Clearing Fund Agency Securities 
or Eligible Clearing Fund Mortgage-Backed Securities, respectively, in 
excess of 25 percent of a member's Required Fund Deposit will be 
subject to an additional haircut equal to twice the percentage as 
specified in Section III.(A). In addition, footnote 8 of subsection (a) 
provides that with regard to a member that pledges Eligible Clearing 
Fund Mortgage-Backed Securities of which it is the issuer, such 
collateral will be subject to a premium haircut as specified in Section 
III.(A). The same language from subsection (a) and footnote 8 of 
Section II.(A)1. is in Section III.(A). Having this language in both 
the Rules and the proposed haircut schedule is unnecessary and could 
potentially create confusion for members. As such, NSCC is proposing to 
eliminate this duplication by deleting subsection (a) and footnote 8 of 
Section II.(A)1., and including this language in the proposed haircut 
schedule.
    Subsection (b) of Section II.(A)1. currently sets out an additional 
concentration limit with respect to Eligible Clearing Fund Agency 
Securities. Specifically, subsection (b) provides that no more than 20 
percent of the Required Fund Deposit may be in the form of Eligible 
Clearing Fund Agency Securities that are of a single issuer. In 
addition, footnote 7 of subsection (a) provides that a member that is 
an Agency may not pledge Eligible Agency Securities of which it is the 
issuer. NSCC is proposing to delete subsection (b) and footnote 7 of 
Section II.(A)1., and move this language to the proposed haircut 
schedule. For clarity, NSCC is also proposing to revise the language 
currently in footnote 7 of Section II.(A)1. to provide that no member 
may pledge Eligible Clearing Fund Agency Securities of which it is the 
issuer to secure its Required Fund Deposit. NSCC would also add 
``Clearing Fund'' in the reference to ``Eligible Agency Securities'' 
currently in the language in subsection (b) of Section II.(A)1. to 
reflect the correct defined term for Eligible Clearing Fund Agency 
Securities, and move ``may be'' earlier in the first sentence for 
clarity.
    Furthermore, NSCC is proposing to add language in Section II.(A)1. 
that makes it clear that all Eligible Clearing Fund Securities pledged 
to secure Clearing Fund deposits shall, for collateral valuation 
purposes, be subject to a haircut and may be subject to a concentration 
limit. The proposed language would provide that NSCC shall determine 
the applicable haircuts and any concentration limits from time to time 
in accordance with its internal

[[Page 68779]]

policy and governance process, based on factors determined to be 
relevant by NSCC, which may include, for example, backtesting results 
and NSCC's assessment of market conditions, in order to set 
appropriately conservative haircuts and/or concentration limits for the 
Eligible Clearing Fund Securities and minimize backtesting deficiency 
occurrences. The proposed language would also provide that the haircuts 
and any concentration limits prescribed by NSCC shall be set forth in a 
haircut schedule that is published on NSCC's website and that it shall 
be the member's responsibility to retrieve the haircut schedule. 
Section II.(A)1. would also indicate that NSCC will provide members 
with at a minimum one Business Day's advance notice of any change in 
the haircut schedule.
    NSCC is proposing to delete Section III of Procedure XV, which 
contains the haircut schedule. In addition, NSCC is proposing to (i) 
remove references to Section III of Procedure XV in two places in Rule 
4, and replace them with a reference to Section II.(A) of Procedure XV 
in each case, (ii) remove references to subsections 1(a) and (b) of 
Section II.(A) of Procedure XV and references to Section III of 
Procedure XV in Rule 56 and (iii) remove a reference to Section III of 
Procedure XV in Section II.(A) of Procedure XV, and replace it with a 
reference to the proposed haircut schedule, to reflect the proposed 
changes described above. NSCC is also proposing to make some 
punctuation and grammar changes and add a reference to Procedure XV in 
Section 12(c) of Rule 56 to clarify the language.
    Finally, NSCC is proposing to clarify some language in Sections 
I.(B)(1), II.(A), II.(B), II.(C) and II.(D) of Procedure XV to reflect 
that Mutual Fund/Insurance Services Members and other Limited Members 
are no longer required to make deposits into the Clearing Fund. In 
2022, NSCC removed the requirement that any Limited Members, including 
Mutual Fund/Insurance Services Members, make any deposits to the 
Clearing Fund.\10\ Sections I.(B)(1), II.(A), II.(B), II.(C) and II.(D) 
of Procedure XV still contain references to Mutual Fund/Insurance 
Service Members and/or Limited Members making deposits into the 
Clearing Fund, and NSCC is proposing to remove those references for 
clarity.
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    \10\ See Securities Exchange Act Release No. 93722 (Dec. 6, 
2021), 86 FR 70548 (Dec. 10, 2021) (SR-NSCC-2021-015).
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    NSCC believes that the proposed change to move the haircuts and 
concentration limits from the Rules to the website would enable NSCC to 
adjust the haircuts and concentration limits without undergoing a rule 
filing process.\11\ By being able to make appropriate and timely 
adjustments to the haircuts and concentration limits, NSCC would have 
the flexibility to respond to changing market conditions more promptly. 
Having the flexibility to respond to changing market conditions more 
promptly would in turn help better ensure that NSCC collects sufficient 
margin from members as well as risk manages its credit exposures to its 
members. The proposed change would also align NSCC with the manner in 
which its affiliate, The Depository Trust Company (``DTC''), provides 
haircut schedules to participants.\12\
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    \11\ Pursuant to Section 806(e)(1) of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act and Rule 19b-
4(n)(1)(i) under the Act, if a change materially affects the nature 
or level of risks presented by NSCC, then NSCC is required to file 
an advance notice. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1)(i).
    \12\ DTC also allows its participants to pledge eligible 
collateral as a portion of the participant fund; however, instead of 
being in the DTC rulebook, the collateral haircut schedules are 
published periodically by Important Notice to DTC participants.
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    Concurrent with moving the haircuts and concentration limits from 
the Rules to the website, NSCC is also proposing to reconfigure the 
categories relating to Treasury securities haircuts by moving the 
Treasury Inflation-Protected Securities (``TIPS'') to a separate 
category and increasing the haircut levels for TIPS. The proposed 
change to TIPS is reflected in Exhibit 3c to this filing. TIPS are a 
type of Treasury security issued by the U.S. government that are 
indexed to inflation such that the principal value of the security 
rises as inflation rises.
    In connection with NSCC's assessments of its collateral haircuts, 
NSCC employs daily backtesting to determine the adequacy of each 
member's collateral haircuts. NSCC compares the collateral haircuts for 
each member with the simulated liquidation gains/losses using the 
actual positions in the member's portfolio, and the actual historical 
security returns. A backtesting deficiency occurs when a member's 
collateral haircuts would not have been adequate to cover the simulated 
liquidation losses.
    In connection with such assessments, NSCC has determined that in 
periods where the inflation rate fluctuates, the current haircut levels 
for TIPS may be inadequate to address the fluctuations from time to 
time. This is because TIPS are indexed to the inflation rate, and 
prices on TIPS move inversely to their yields, e.g., when the inflation 
rate increases, prices on TIPS decrease. When the decline in market 
value of TIPS exceeds the haircut for TIPS, NSCC would be exposed to 
potential liquidation losses. Accordingly, NSCC is proposing to 
reconfigure and modify the haircut information that would be posted on 
NSCC's website to ensure that the haircut levels would be commensurate 
with the particular risk attributes of TIPS.
    Specifically, NSCC would list TIPS of various maturity groupings in 
a separate category from Treasury bills, notes and bonds. In addition, 
NSCC would change the haircut level applicable for TIPS as follows:

----------------------------------------------------------------------------------------------------------------
                                                      Maturity                  Current %          Proposed %
----------------------------------------------------------------------------------------------------------------
TIPS...................................  Zero to 1 year...................                2.0                2.0
                                         1 year to 2 years................                2.0                3.0
                                         2 years to 5 years...............                3.0                5.0
                                         5 years to 10 years..............                4.0                7.0
                                         10 years to 15 years.............                6.0                7.0
                                         15 years or greater..............                6.0               10.0
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    In determining the appropriate haircut levels for TIPS, NSCC 
conducted a review of TIPS haircuts at other registered clearing 
agencies and foreign central counterparty clearing houses (``CCPs'') to 
compare NSCC's current TIPS haircuts with that required by registered 
clearing agencies and foreign CCPs when TIPS are deposited to their 
clearing funds, or the equivalent thereof. The results of the review 
and comparison indicated that NSCC's current haircut levels for TIPS 
are generally lower than the TIPS haircuts required by other clearing 
agencies and

[[Page 68780]]

foreign CCPs, particularly with respect to maturity ranges of 10 years 
or longer. While the TIPS haircut requirement at such other entities is 
not dispositive as to the risk borne by NSCC or the proper TIPS haircut 
levels to offset such risk, it is indicative of the TIPS haircuts being 
applied to users of other similarly situated entities in order to use 
the services of the clearing agencies and foreign CCPs and the impact 
to such users. The chart below shows the haircuts that participants of 
other clearing agencies and foreign CCPs are currently subject to when 
using TIPS to meet their margin requirements, as compared with the 
existing TIPS haircuts required at NSCC.
[GRAPHIC] [TIFF OMITTED] TN04OC23.013

    NSCC is not proposing any changes to the concentration limits at 
this time.
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    \13\ See ICE Clear U.S. Acceptable Collateral and Haircuts, 
available at www.theice.com/publicdocs/clear_us/ICUS_Collateral_Information.pdf.
    \14\ See LCH LTD-Margin Collateral Haircut Schedule, available 
at www.lch.com/system/files/media_root/Collateral/Acceptable%20Collateral%20Haircuts%20LCH%20Ltd_0.pdf.
    \15\ See CME Group Acceptable Performance Bond Collateral for 
Base Guaranty Fund Products, available at www.cmegroup.com/clearing/files/acceptable-collateral-futures-options-select-forwards.pdf.
    \16\ See OCC Collateral Haircut Schedule, available at 
www.theocc.com/clearance-and-settlement/acceptable-collateral-haircuts.
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Impact Study
    NSCC conducted an impact study for the period from September 1, 
2021 through August 31, 2022 (``Impact Study''). If the proposed 
haircut adjustments had been in place during the Impact Study period, 
the changes would have resulted in an average daily increase of 
$197,000 in the Clearing Fund assuming TIPS were deposited. Two members 
would have been impacted with a daily average dollar increase of 
approximately $123,000 (or 0.10% of their average Clearing Fund 
deposit) and $74,000 (or 0.31% of their average Clearing Fund deposit), 
respectively, had the proposed changes been in place.

Implementation Timeframe

    Subject to approval by the Commission, NSCC expects to implement 
this proposal by no later than 60 Business Days after such approval and 
would announce the effective date of the proposed changes by an 
Important Notice posted to NSCC's website.
2. Statutory Basis
    NSCC believes this proposal is consistent with the requirements of 
the Act, and the rules and regulations thereunder applicable to a 
registered clearing agency. Specifically, NSCC believes that the 
proposed changes described above are consistent with Section 
17A(b)(3)(F) of the Act,\17\ and Rules 17Ad-22(e)(4)(i), (e)(5), 
(e)(6)(i), and (e)(6)(v), each promulgated under the Act,\18\ for the 
reasons described below.
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(5), (e)(6)(i), and 
(e)(6)(v).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions, and to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible.\19\ As 
described above, NSCC believes the proposed changes to move the 
collateral haircuts and concentration limits from the Rules to the 
website would provide NSCC with more flexibility to respond to changing 
market conditions because adjustments to the haircuts and concentration 
limits would no longer require a rule change. By being able to make 
appropriate and timely adjustments to the haircuts and concentration 
limits, NSCC would have the flexibility to respond to changing market 
conditions more promptly. NSCC believes that having this additional 
flexibility to respond to changing market conditions more promptly 
would help better ensure that NSCC (i) collects sufficient margin from 
members to cover the risk exposures that NSCC may face in liquidating 
members' portfolios and (ii) minimizes exposures from members with 
large collateral positions in a particular group of securities with a 
similar risk profile or in a particular asset type, such that, in the 
event of a member default, NSCC's operations would not be disrupted, 
and non-defaulting members would not be exposed to losses they cannot 
anticipate or control. In this way, the proposed rule change to move 
the collateral haircuts and concentration limits from the Rules to the 
website would assure the safeguarding of securities and funds which are 
in the custody and control of NSCC or for

[[Page 68781]]

which it is responsible, consistent with Section 17A(b)(3)(F) of the 
Act.\20\
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
    \20\ Id.
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    NSCC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut levels for TIPS would help 
ensure that the haircut levels for TIPS would be commensurate with the 
particular risk attributes of TIPS. NSCC has determined that in periods 
where the inflation rate fluctuates, the current haircut levels for 
TIPS have been inadequate to address the fluctuations from time to 
time, and more conservative haircuts for TIPS are warranted. Having 
haircut levels for TIPS that are commensurate with the particular risk 
attributes of TIPS would enable NSCC to collect sufficient margin from 
members to cover the risk exposures that NSCC may face in liquidating 
members' portfolios such that, in the event of a member default, NSCC's 
operations would not be disrupted, and non-defaulting members would not 
be exposed to losses they cannot anticipate or control. In this way, 
the proposed rule change to move TIPS haircuts into a separate category 
and raise the haircut levels for TIPS would assure the safeguarding of 
securities and funds which are in the custody and control of NSCC or 
for which it is responsible, consistent with Section 17A(b)(3)(F) of 
the Act.\21\
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    \21\ Id.
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    NSCC believes that the proposed clarifying changes would help to 
ensure that the Rules are clear to members. When members better 
understand their rights and obligations regarding the Rules, members 
are more likely to act in accordance with the Rules, which NSCC 
believes would promote the prompt and accurate clearance and settlement 
of securities transactions. As such, NSCC believes that the proposed 
clarifying changes would be consistent with Section 17A(b)(3)(F) of the 
Act.\22\
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    \22\ Id.
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    Rule 17Ad-22(e)(4)(i) under the Act \23\ requires a covered 
clearing agency to 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 exposures arising from its payment, clearing, and settlement 
processes by maintaining sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence. As described above, NSCC believes the proposed changes to 
move the collateral haircuts and concentration limits from the Rules to 
the website would provide NSCC with more flexibility to respond to 
changing market conditions because adjustments to the haircuts and 
concentration limits would no longer require a rule change. By being 
able to make appropriate and timely adjustments to the haircuts and 
concentration limits, NSCC would have the flexibility to respond to 
changing market conditions more promptly. NSCC believes that having 
this additional flexibility to respond to changing market conditions 
more promptly would help ensure that NSCC (i) collects sufficient 
margin from members to cover the risk exposures that NSCC may face in 
liquidating members' portfolios and (ii) minimizes exposures from 
members with large collateral positions in a particular group of 
securities with a similar risk profile or in a particular asset type, 
such that, in the event of a member default, NSCC's operations would 
not be disrupted, and non-defaulting members would not be exposed to 
losses they cannot anticipate or control. In this way, the proposed 
rule change to move the collateral haircuts and concentration limits 
from the Rules to the website would help ensure that NSCC maintains 
sufficient financial resources to cover its credit exposure to each 
participant fully with a high degree of confidence, consistent with the 
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\24\
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    \23\ 17 CFR 240.17Ad-22(e)(4)(i).
    \24\ Id.
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    NSCC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut levels for TIPS would help 
ensure that the haircut levels for TIPS would be commensurate with the 
particular risk attributes of TIPS. NSCC has determined that in periods 
where the inflation rate fluctuates, the current haircut levels for 
TIPS may be inadequate to address the fluctuations from time to time, 
and more conservative haircuts for TIPS are warranted. Ensuring that 
the haircut levels for TIPS are commensurate with the particular risk 
attributes of TIPS would in turn help ensure that NSCC requires members 
to maintain sufficient margin to cover the credit exposures that NSCC 
may face related to its ability to liquidate members' portfolios in the 
event of a member default. In this way, the proposed rule change to 
move TIPS haircuts into a separate category and raise the haircut 
levels for TIPS would help ensure that NSCC maintains sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence, consistent with the 
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\25\
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    \25\ Id.
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    Rule 17Ad-22(e)(5) under the Act \26\ requires, in part, a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to set and enforce 
appropriately conservative haircuts and concentration limits if the 
covered clearing agency requires collateral to manage its or its 
participants' credit exposure. As described above, NSCC believes the 
proposed changes to move the collateral haircuts and concentration 
limits from the Rules to the website would provide NSCC with more 
flexibility to respond to changing market conditions because 
adjustments to the haircuts and concentration limits would no longer 
require a rule change. By being able to make appropriate and timely 
adjustments to the haircuts and concentration limits, NSCC would have 
the flexibility to respond to changing market conditions more promptly. 
NSCC believes that having this additional flexibility to respond to 
changing market conditions more promptly would help better ensure that 
NSCC (i) collects sufficient margin from members to cover the risk 
exposures that NSCC may face in liquidating members' portfolios and 
(ii) minimizes exposures from members with large collateral positions 
in a particular group of securities with a similar risk profile or in a 
particular asset type, such that, in the event of a member default, 
NSCC's operations would not be disrupted, and non-defaulting members 
would not be exposed to losses they cannot anticipate or control. 
Specifically, NSCC would have the ability to promptly set and enforce 
conservative collateral haircuts and concentration limits that are 
reflective of the current market conditions. In this way, the proposed 
changes to move the collateral haircuts and concentration limits from 
the Rules to the website would help NSCC set and enforce appropriately 
conservative collateral haircuts and concentration limits, consistent 
with the requirements of Rule 17Ad-22(e)(5) under the Act.\27\
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    \26\ 17 CFR 240.17Ad-22(e)(5).
    \27\ Id.
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    NSCC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut levels for TIPS would help 
ensure that the haircut levels for TIPS would be commensurate with the 
particular risk attributes of TIPS. NSCC has determined that in periods 
where the inflation rate fluctuates, the current haircut levels for 
TIPS have been inadequate to address the fluctuations from time to 
time, and more conservative haircuts for TIPS are

[[Page 68782]]

warranted. Specifically, NSCC would have the ability to set and enforce 
conservative collateral haircuts that are commensurate with the 
particular risk attributes of TIPS. In this way, the proposed changes 
to move TIPS haircuts into a separate category and raise the haircut 
levels for TIPS would help NSCC set and enforce appropriately 
conservative collateral haircuts, consistent with the requirements of 
Rule 17Ad-22(e)(5) under the Act.\28\
---------------------------------------------------------------------------

    \28\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act \29\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, 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. NSCC believes that the proposed changes 
to move the collateral haircuts and concentration limits from the Rules 
to the website would provide NSCC with more flexibility to respond to 
changing market conditions because NSCC would be able to make 
appropriate adjustments to the haircuts and concentration limits 
without a rule change. By being able to make appropriate and timely 
adjustments to the haircuts and concentration limits, NSCC would have 
the flexibility to respond to changing market conditions more promptly. 
NSCC believes that having this additional flexibility to respond to 
changing market conditions more promptly would enable NSCC to better 
risk manage its credit exposure to its members by (i) collecting 
sufficient margin from members to cover the risk exposures that NSCC 
may face in liquidating members' portfolios and (ii) minimizing 
exposures from members with large collateral positions in a particular 
group of securities with a similar risk profile or in a particular 
asset type, thus allowing NSCC to produce margin levels commensurate 
with the risks and particular attributes of each relevant product, 
portfolio, and market. Therefore, NSCC believes this proposed change is 
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\30\
---------------------------------------------------------------------------

    \29\ 17 CFR 240.17Ad-22(e)(6)(i).
    \30\ Id.
---------------------------------------------------------------------------

    NSCC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut levels for TIPS would help 
ensure that the haircut levels for TIPS would be commensurate with the 
particular risk attributes of TIPS. NSCC has determined that in periods 
where the inflation rate fluctuates, the current haircut levels for 
TIPS may be inadequate to address the fluctuations from time to time, 
and more conservative haircuts for TIPS are warranted. Ensuring that 
the haircut levels for TIPS are commensurate with the particular risk 
attributes of TIPS would allow NSCC to produce margin levels 
commensurate with the risks and particular attributes of each relevant 
product, portfolio, and market. Therefore, NSCC believes this proposed 
change is consistent with Rule 17Ad-22(e)(6)(i) under the Act.\31\
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(v) under the Act \32\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, uses an appropriate method for measuring 
credit exposure that accounts for relevant product risk factors and 
portfolio effects across products. NSCC believes that the proposed 
changes to move the collateral haircuts and concentration limits from 
the Rules to the website would provide NSCC with more flexibility to 
respond to changing market conditions more promptly because NSCC would 
be able to make appropriate adjustments to the haircuts and 
concentration limits without a rule change. Having this additional 
flexibility would enable NSCC to better risk manage its credit exposure 
to its members because NSCC would then be able to make appropriate and 
timely adjustments to the haircuts and concentration limits, as 
described above. Being able to adjust the haircuts and concentration 
limits appropriately and timely would allow NSCC to better risk manage 
its credit exposure to its members by (i) collecting sufficient margin 
from members to cover the risk exposures that NSCC may face in 
liquidating members' portfolios and (ii) minimizing exposures from 
members with large collateral positions in a particular group of 
securities with a similar risk profile or in a particular asset type, 
thus producing margin levels commensurate with relevant product risk 
factors and portfolio effects across products. Therefore, NSCC believes 
this proposed change is consistent with Rule 17Ad-22(e)(6)(v) under the 
Act.\33\
---------------------------------------------------------------------------

    \32\ 17 CFR 240.17Ad-22(e)(6)(v).
    \33\ Id.
---------------------------------------------------------------------------

    NSCC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut levels for TIPS would help 
ensure that the haircut levels for TIPS would be commensurate with the 
particular risk attributes of TIPS. Specifically, as proposed, NSCC 
would have collateral haircuts that are commensurate with the 
particular risk attributes of TIPS. Ensuring that the haircut levels 
for TIPS are commensurate with the particular risk attributes of TIPS 
would allow NSCC to produce margin levels commensurate with relevant 
product risk factors and portfolio effects across products. Therefore, 
NSCC believes this proposed change is consistent with Rule 17Ad-
22(e)(6)(v) under the Act.\34\
---------------------------------------------------------------------------

    \34\ Id.
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(I) of the Act requires that the rules of NSCC do 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.\35\ NSCC does not believe the 
proposed rule changes to move the haircuts and concentration limits 
from the Rules to the website would impose a burden on competition. 
These proposed changes are designed to enable NSCC to timely respond to 
increases in market volatility with haircut requirements and 
concentration limits that are more reflective of the current credit 
exposures to NSCC. As discussed above, these proposed changes would 
allow NSCC to better risk manage its credit exposure to its members by 
(i) collecting sufficient margin from members to cover the risk 
exposures that NSCC may face in liquidating members' portfolios and 
(ii) minimizing exposures from members with large collateral positions 
in a particular group of securities with a similar risk profile or in a 
particular asset type, such that, in the event of a member default, 
NSCC's operations would not be disrupted, and non-defaulting members 
would not be exposed to losses they cannot anticipate or control. These 
proposed changes would not unfairly inhibit access to NSCC's services, 
or disadvantage or favor any particular member in relationship to 
another member. The proposed changes would allow NSCC to adjust the 
haircuts and concentration limits more promptly and would not otherwise 
affect members' access to NSCC's services. In addition, any changes to 
the haircuts or concentration limits would be directly related to the 
perceived risk related to members' collateral based on back-tests, 
stress-tests and market observations, and

[[Page 68783]]

would be applied uniformly to all members. Accordingly, NSCC believes 
that these proposed changes would not impose any burden or have any 
impact on competition.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Similarly, NSCC does not believe the proposed rule changes to move 
TIPS haircuts into a separate category would impose a burden on 
competition. These proposed changes are designed to improve the clarity 
and presentation of the haircut information. These proposed changes 
would not unfairly inhibit access to NSCC's services, or disadvantage 
or favor any particular member in relationship to another member, and 
the changes would be applied uniformly to all members. Accordingly, 
NSCC believes that these proposed changes would not impose any burden 
or have any impact on competition.
    NSCC believes the proposed changes to raise certain TIPS haircut 
levels may have an impact on competition because these changes could 
result in members' Eligible Clearing Fund Securities being subject to 
higher haircuts than they would have been under the current haircut 
schedule. NSCC believes that the proposed change could burden 
competition by potentially increasing these members' operating costs by 
requiring members who are using TIPS as collateral to pledge additional 
collateral. Nonetheless, NSCC believes any burden on competition 
imposed by the proposed changes would not be significant and, 
regardless of whether such burden on competition could be deemed 
significant, would be necessary and appropriate, as permitted by 
Section 17A(b)(3)(I) of the Act for the reasons described in this 
filing and further below.\36\
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    NSCC believes any burden on competition presented by the proposed 
changes to the TIPS haircut levels would not be significant. As 
discussed above, if the proposed changes to the TIPS haircut levels had 
been in place during the Impact Study period, two members would have 
been impacted with an daily average dollar increase of approximately 
$123,000 (or 0.10% of their average Clearing Fund deposit) and $74,000 
(or 0.31% of their average Clearing Fund deposit), respectively. In 
addition, NSCC believes that the proposed changes to the TIPS haircut 
levels are comparable with what is being required of users of other 
similar registered clearing agencies and foreign CCPs when posting TIPS 
as collateral.
    NSCC believes any burden on competition that may be imposed by the 
proposed changes to the TIPS haircut levels would be necessary because, 
as described above, the proposed changes would help ensure that the 
collateral values attributed to TIPS would be commensurate with the 
particular risk attributes of TIPS. Making sure proper collateral 
values are attributed to TIPS that are used as margin would thus help 
better ensure that NSCC collects sufficient margin from members and 
thereby assure the safeguarding of securities and funds which are in 
the custody and control of NSCC or for which it is responsible, 
consistent with Section 17A(b)(3)(F) of the Act.\37\
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In addition, NSCC believes the proposed changes to the TIPS haircut 
levels are necessary to support NSCC's compliance with Rules 17Ad-
22(e)(4)(i), (e)(5), (e)(6)(i), and (e)(6)(v) under the Act. 
Specifically, as described above, NSCC believes these proposed changes 
would ensure that the haircut levels for TIPS are commensurate with the 
particular risk attributes of TIPS. Having haircut levels for TIPS that 
are commensurate with the particular risk attributes of TIPS would 
ensure proper collateral valuation for TIPS used as margin. Ensuring 
proper collateral valuation for TIPS used as margin would help NSCC 
better measure, monitor, and manage its credit exposures to 
participants and those exposures arising from its payment, clearing, 
and settlement processes, consistent with the requirements of Rule 
17Ad-22(e)(4)(i) under the Act.\38\ Ensuring proper collateral 
valuation for TIPS used as margin would also allow NSCC to set and 
enforce appropriately conservative collateral haircuts, consistent with 
the requirements of Rule 17Ad-22(e)(5) under the Act.\39\ It would also 
help NSCC cover its credit exposures to its participants, consistent 
with the requirements of Rules 17Ad-22(e)(6)(i) and (e)(6)(v) under the 
Act.\40\
---------------------------------------------------------------------------

    \38\ 17 CFR 240.17Ad-22(e)(4)(i).
    \39\ 17 CFR 240.17Ad-22(e)(5).
    \40\ 17 CFR 240.17Ad-22(e)(6)(i) and (e)(6)(v).
---------------------------------------------------------------------------

    NSCC also believes that any burden on competition that may be 
imposed by the proposed changes to the TIPS haircut levels would be 
appropriate in furtherance of the Act because these proposed changes 
have been specifically designed to assure the safeguarding of 
securities and funds which are in the custody and control of NSCC or 
for which it is responsible, as required by Section 17A(b)(3)(F) of the 
Act.\41\ As described above, NSCC believes these proposed changes would 
help better ensure that NSCC collects sufficient margin from members, 
thus enabling NSCC to produce margin levels more commensurate with the 
risks it faces as a central counterparty. Accordingly, NSCC believes 
these proposed changes are appropriately designed to meet its risk 
management goals and regulatory obligations.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    NSCC does not believe the proposed clarifying changes to the Rules 
would impact competition. These changes would help to ensure that the 
Rules remain clear. In addition, the changes would facilitate members' 
understanding of the Rules and their obligations thereunder. These 
changes would not affect NSCC's operations or the rights and 
obligations of the membership. As such, NSCC believes the proposed 
clarifying 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 additional 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 
SEC's Division of Trading and Markets at [email protected] or 
202-551-5777.
    NSCC reserves the right to not 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 68784]]

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-2023-009 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-2023-009. 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 
(dtcc.com/legal/sec-rule-filings). Do not include personal identifiable 
information in submissions; you should submit only information that you 
wish to make available publicly. We may redact in part or withhold 
entirely from publication submitted material that is obscene or subject 
to copyright protection. All submissions should refer to File Number 
SR-NSCC-2023-009 and should be submitted on or before October 25, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
---------------------------------------------------------------------------

    \42\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21936 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P