Document ID: SEC-2021-1110-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2021-08-17T04:00Z

[Federal Register Volume 86, Number 156 (Tuesday, August 17, 2021)]
[Notices]
[Pages 46043-46047]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17541]

[[Page 46043]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92640; File No. SR-NSCC-2021-005]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Partial Amendment No. 1 and Order 
Granting Accelerated Approval of Proposed Rule Change, as Modified by 
Partial Amendment No. 1, To Increase the National Securities Clearing 
Corporation's Minimum Required Fund Deposit

August 11, 2021.

I. Introduction

    On April 26, 2021, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2021-005 (the ``Proposed 
Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder \2\ to increase its 
minimum required fund deposit. The Proposed Rule Change was published 
for comment in the Federal Register on May 14, 2021,\3\ and the 
Commission has received comments \4\ on the changes proposed 
therein.\5\ On June 24, 2021, pursuant to Section 19(b)(2) of the 
Act,\6\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change.\7\ On August 5, 2021, 
NSCC filed a partial amendment (``Partial Amendment No. 1'') to modify 
the Proposed Rule Change.\8\ The Commission is publishing this notice 
to solicit comments on Partial Amendment No. 1 from interested persons 
and is approving the Proposed Rule Change, as modified by Partial 
Amendment No. 1, on an accelerated basis.\9\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 91809 (May 10, 2021), 86 
FR 26588 (May 14, 2021) (File No. SR-NSCC-2021-005) (``Notice of 
Filing'').
    \4\ See Letter from Parsons, Behle & Latimer, Counsel for Alpine 
Securities Corporation, dated June 4, 2021, to Vanessa Countryman, 
Secretary, Commission (``Alpine Letter''), available at https://www.sec.gov/comments/sr-nscc-2021-005/srnscc2021005.htm.
    \5\ NSCC appended an Exhibit 2 to the materials filed on April 
26, 2021. The appended Exhibit 2 consists of a comment letter that 
NSCC received from one of its members objecting to NSCC's proposal 
in response to member outreach NSCC conducted in 2019 (``Wachtel 
Letter''). See Notice of Filing, supra note 3, at 26593. NSCC 
considered that comment in its Proposed Rule Change, and the 
Commission has considered the comment letter in making its 
determination, as discussed in Section III below. A copy of the 
comment letter is available at https://www.dtcc.com/-/media/Files/Downloads/legal/rule-filings/2021/NSCC/SR-NSCC-2021-005.pdf.
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ Securities Exchange Act Release No. 92250 (June 24, 2021), 
86 FR 34798 (June 30, 2021) (File No. SR-NSCC-2021-005).
    \8\ In Partial Amendment No. 1, NSCC updates the proposed rule 
text filed as Exhibit 5 to the proposed rule change to include a 
legend to indicate a delayed implementation date, specifically that 
the rule change would be implemented not later than 20 business days 
after Commission approval of the Proposed Rule Change. NSCC did not 
change the purpose or substance of, or basis for, the Proposed Rule 
Change.
    \9\ References to the Proposed Rule Change from this point 
forward refer to the Proposed Rule Change as modified by Partial 
Amendment No. 1.
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II. Description of the Proposed Rule Change

    Currently, NSCC requires each Member to maintain a minimum Required 
Fund Deposit \10\ amount of $10,000.\11\ NSCC proposes to increase each 
Member's minimum Required Fund Deposit amount to $250,000.
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    \10\ Capitalized terms not defined herein are defined in NSCC's 
Rules and Procedures (``Rules''), available at http://dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
    \11\ See Section 1 of Rule 4, id.
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A. Background

    NSCC provides central counterparty (``CCP'') services, including 
clearing, settlement, risk management, and a guarantee of completion 
for virtually all broker-to-broker trades involving equity securities, 
corporate and municipal debt securities, and certain other securities. 
In its role as a CCP, a key tool NSCC uses to manage its credit 
exposure to its Members is determining and collecting an appropriate 
Required Fund Deposit (i.e., margin) from each Member.\12\ A Member's 
Required Fund Deposit serves as collateral to mitigate potential losses 
to NSCC associated with the liquidation of the Member's portfolio 
should that Member default. The aggregate of all Members' Required Fund 
Deposits constitutes NSCC's Clearing Fund, which it would access, among 
other instances, 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.\13\
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    \12\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters) of the Rules (``Procedure XV''), supra 
note 8. The minimum Required Fund Deposit amount is required to be 
in cash. See Section II.(A) of Procedure XV, supra note 8.
    \13\ See id.
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    NSCC conducts daily backtesting to evaluate whether each Member's 
Required Fund Deposit is sufficient to cover NSCC's credit exposures to 
that Member based on a simulated liquidation of the Member's portfolio 
on that day.\14\ Backtesting is an ex-post comparison of actual 
outcomes with expected outcomes derived from the use of margin 
models.\15\ A backtesting deficiency occurs when NSCC determines that 
the projected liquidation losses to NSCC arising in the event of a 
Member's default would be greater than the Member's Required Fund 
Deposit.\16\ Therefore, backtesting deficiencies highlight exposure 
that could subject NSCC to potential losses under normal market 
conditions in the event that a Member defaults.\17\
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    \14\ See Securities Exchange Act Release No. 81485 (August 25, 
2017), 82 FR 41433 (August 31, 2017) (NSCC-2017-008) (adopting Model 
Risk Management Framework and stating that Required Fund Deposit 
backtesting would be performed at least on a daily basis); 
Securities Exchange Act Release No. 84458 (October 19, 2018), 83 FR 
53925 (October 25, 2018) (File No. SR-NSCC-2018-009) (amending the 
Model Risk Management Framework to provide enhanced governance).
    \15\ See 17 CFR 240.17Ad-22(a)(1).
    \16\ See Notice of Filing, supra note 3, at 26589.
    \17\ See id.
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    NSCC regularly reviews backtesting results to assess the 
effectiveness of its margining requirements.\18\ As part of its review, 
NSCC investigates the causes of any backtesting deficiencies, paying 
particular attention to repeat backtesting deficiencies that would 
result in the Member's backtesting coverage to fall below the 99% 
confidence target to determine if there is an identifiable cause of 
repeat backtesting deficiencies.\19\ NSCC also evaluates whether 
multiple Members may experience backtesting deficiencies for the same 
underlying reason.\20\
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    \18\ See Notice of Filing, supra note 3, at 26589.
    \19\ NSCC states a Member's backtesting coverage would fall 
below the 99% confidence target if the Member has more than two 
backtesting deficiency days in a rolling twelve-month period. See 
Notice of Filing, supra note 3, at 26589. In other words, if a 
Member has three or more backtesting deficiency days during a 
twelve-month period, then the Member's margin would not be 
sufficient 99% of the time. NSCC believes that its targeted 99% 
confidence level is consistent with its regulatory requirements 
under Rule 17Ad-22(e)(4)(i) and (e)(6)(iii). 17 CFR 240.17Ad-22 
(e)(4)(i), and (e)(6)(iii).
    \20\ See Notice of Filing, supra note 3, at 26589.
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    Based on its regular reviews, NSCC states it has found that Members 
with Required Fund Deposits below $250,000 disproportionately 
experience repeat backtesting deficiencies because, should the Member's 
settlement activity abruptly increase, the additional exposure to NSCC 
would not be mitigated until the collection of the Required Fund 
Deposit either intraday or on the next business day.\21\ NSCC states it 
has also found that its current minimum margin requirement of $10,000 
is disproportionately lower

[[Page 46044]]

than the minimum margin requirements of other CCPs that clear similar 
securities products.\22\
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    \21\ See id.
    \22\ See id. For example, the minimum initial contribution for 
The Options Clearing Corporation (``OCC'') is $500,000. See Rule 
1002(d) of the OCC Rules, available at https://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_rules.pdf. The minimum 
Required Fund Deposit for both the Government Securities Division 
(``GSD'') and Mortgage-Backed Securities Division (``MBSD'') of 
Fixed Income Clearing Corporation (``FICC'') is $100,000. See Rule 4 
of FICC GSD Rulebook, available at http://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf and Rule 4 of the 
FICC MBSD Clearing Rules, available at http://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_mbsd_rules.pdf.
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    Therefore, NSCC proposes to increase its minimum Required Fund 
Deposit from $10,000 to $250,000.

B. Impact Study Results

    To support its proposal, NSCC relies upon the results of recent 
backtesting analyses.\23\ Specifically, NSCC examines the backtesting 
coverage \24\ of each of its Members during the period from June 3, 
2019 to May 29, 2020, under the current $10,000 minimum Required Fund 
Deposit amount compared to hypothetical (or ``pro forma'') minimum 
Required Fund Deposit amounts, including the proposed $250,000 amount 
and $100,000 (``Impact Study Results'').\25\ NSCC uses the Impact Study 
Results to show the number of Member backtesting deficiencies \26\ that 
would have been eliminated during the period had NSCC's minimum 
Required Fund Deposit been $250,000 and compared to $100,000. NSCC then 
uses the Impact Study Results to analyze the improvement to each 
Member's backtesting coverage ratio \27\ and, taking all Members' 
backtesting coverage ratio results together, to analyze the improvement 
to NSCC's Clearing Fund backtesting coverage.\28\
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    \23\ See supra text accompanying notes 12-16.
    \24\ See supra note 17 and accompanying text.
    \25\ NSCC provided a public summary of the information in this 
Section II.B in its Notice of Filing, upon which this discussion is 
based. See Notice of Filing, supra note 3, at 26590-92. NSCC filed 
the data underlying the Impact Study Results as a confidential 
Exhibit 3 to the Proposed Rule Change pursuant to 17 CFR 240.24b-2.
    \26\ See supra text accompanying notes 14-15.
    \27\ See supra note 17 and accompanying text.
    \28\ The Clearing Fund backtesting coverage represents the daily 
sufficiency of the aggregate of all Members' margin over a rolling 
12-month period. As described in Section II.A above, NSCC would be 
able to access the Clearing Fund to cover any losses to it should a 
Member with insufficient margin default. See supra text accompanying 
note 11.
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    During the impact study period under the current minimum Required 
Fund Deposit, NSCC observed a total of 227 Member backtesting 
deficiencies, and 29 Members experienced repeat backtesting 
deficiencies causing them to fall below the 99% confidence target.\29\ 
Members with a Required Fund Deposit lower than $250,000 accounted for 
22% of the total backtesting deficiencies and constituted approximately 
45% of the Members whose margin levels fell below the 99% confidence 
target.\30\ Additionally, NSCC's twelve-month aggregate Clearing Fund 
backtesting coverage was 99.28%.
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    \29\ See id.
    \30\ See id.
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    A minimum requirement of $250,000 would have eliminated 44 
backtesting deficiencies across 13 Members and would have eliminated 
approximately 88% of the deficiencies that occurred on the days when 
Members maintained a Required Fund Deposit of less than $250,000.\31\ 
Additionally, a minimum requirement of $250,000 would have improved 
NSCC's rolling twelve-month coverage for seven Members to above the 99% 
confidence interval.\32\ NSCC states that, if the proposed $250,000 
minimum had been in place, the remaining Members still below the 99% 
confidence interval would constitute only 27% of Members that fell 
below the 99% confidence target, which is comparable to those Members' 
overall representation as a class of NSCC's total Members.\33\ 
Moreover, a minimum requirement of $250,000 would have increased NSCC's 
twelve-month aggregate Clearing Fund backtesting coverage by 0.14% to 
99.41%.\34\
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    \31\ See Notice of Filing, supra note 3, at 26590. Not all of 
the backtesting deficiencies would have been eliminated because if 
the Member's Required Fund Deposit calculation increases to above 
$250,000 intraday, due to, for example, increases in trading volume 
and/or adverse mark-to-market adjustments, the $250,000 proposed 
minimum Required Fund Deposit would still be insufficient to cover 
NSCC's exposure between margin collections. See supra text 
accompanying note 19.
    \32\ See Notice of Filing, supra note 3, at 26590.
    \33\ See id.
    \34\ See id.
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    An increase to $250,000 compared to $100,000 would have further 
reduced NSCC's credit exposure to its Members by eliminating ten 
additional backtesting deficiencies from 34 to 44 total backtesting 
deficiencies and resulting in increasing two additional Members' margin 
levels to above the 99% confidence interval from five Members to seven 
Members. Additionally, NSCC's aggregate Clearing Fund backtesting 
coverage would have improved from 99.38% to 99.41% representing an 
increase of 0.03%.
    NSCC had approximately 150 total Members during the impact study 
period.\35\ Of those, 46 Members would be impacted by the proposed 
$250,000 minimum Required Fund Deposit.\36\ On average, 18 Members 
maintained excess deposits greater than the proposed increase; 
therefore, 28 Members on average would have been required to deposit 
additional funds if the proposal had been implemented.\37\ In addition, 
the 46 Members that would be impacted by the proposed $250,000 minimum 
Required Fund Deposit maintained excess net capital or equity capital 
(as applicable) (``ENC'') in excess of $800,000 on average over the 
Impact Study Period, ranging between an average of $834,000 to $211.5 
billion, with 98% of the impacted Members having on average an ENC 
above $2.5 million.\38\ NSCC states it used ENC in its analysis to 
estimate impacted Members' ability to satisfy additional Required Fund 
Deposit amounts required by the proposal.\39\
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    \35\ See CPMI IOSCO Quantitative Disclosure Results 2019 Q2 
(September 25, 2019), available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/CPMI-IOSCO-Quantitative-Disclosure-Results-2019-Q2-2.pdf.
    \36\ See Notice of Filing, supra note 3 at 26593.
    \37\ See id.
    \38\ See id.
    \39\ See id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \40\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. After careful consideration, the 
Commission finds that the Proposed Rule Change is consistent with the 
requirements of the Act and the rules and regulations applicable to 
NSCC.\41\ In particular, the Commission finds that the Proposed Rule 
Change is consistent with Section 17A(b)(3)(F) and (b)(3)(I) \42\ of 
the Act and Rules 17Ad-22(e)(4) and (e)(6) thereunder.\43\
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    \40\ 15 U.S.C. 78s(b)(2)(C).
    \41\ The Commission's findings are based on its review of the 
Proposed Rule Change, including its analysis of the Impact Study 
Results, which are summarized in Section II.B above. See supra note 
23 and accompanying text.
    \42\ 15 U.S.C. 78q-1(b)(3)(F).
    \43\ 17 CFR 240.17Ad-22(e)(4) and (e)(6).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency, such as NSCC, be designed, in part, 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\ The 
Commission believes

[[Page 46045]]

that the Proposed Rule Change is consistent with Section 17A(b)(3)(F) 
of the Act.
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    \44\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed in Section II.A above, backtesting deficiencies 
highlight when a Member's margin is insufficient to cover NSCC's credit 
exposure to that Member.\45\ If a defaulted Member's margin is 
insufficient to satisfy losses caused by the closeout of that Member's 
positions, NSCC and its non-defaulting Members may be subject to 
losses. As summarized in Section II.B above, the proposed increase 
would have provided NSCC with additional resources, which would have 
resulted in a decrease in backtesting deficiencies and thus a reduction 
in credit exposure to its Members under the proposal.\46\ Therefore, 
the Commission believes NSCC would improve the probability that the 
increased minimum margin amount it collects is sufficient to cover 
NSCC's credit exposure to those Members, particularly in instances 
where the defaulted Member's clearing activity abruptly increases 
following a period of low or no activity. This increase, in turn, could 
reduce the possibility that NSCC or its non-defaulting Members face 
losses from the close-out process.
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    \45\ See supra text accompanying note 15.
    \46\ See supra text accompanying notes 29-31.
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    Moreover, NSCC would continue to require that Members pay an amount 
equal to the minimum Required Fund Deposit amount in cash. Therefore, 
the proposal would enable NSCC to have available additional collateral 
that is easier for NSCC to access quickly to complete end of day 
settlement upon a Member's default, further reducing the risk of losses 
to NSCC or non-defaulting Members. Accordingly, the Commission believes 
the Proposed Rule Change would promote the safeguarding of securities 
and funds which are in the custody or control of NSCC or for which NSCC 
is responsible, consistent with Section 17A(b)(3)(F) of the Act.\47\
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    \47\ In addition to its arguments about the Proposed Rule 
Change, one commenter also asserts that NSCC's other recent efforts 
to increase capital or methodology-based margin requirements 
represent unfair discrimination against Members who deal in stocks 
trading in the OTC Markets, inconsistent with Section 17A(b)(3)(F) 
of the Act. See Alpine Letter, supra note 4, at 4-5. However, the 
Proposed Rule Change would not amend NSCC's capital or methodology-
based margin requirements and is limited to the amendment of the 
minimum Required Fund Deposit amount. Therefore, the commenter's 
arguments pursuant to Section 17A(b)(3)(F) of the Act are outside 
the scope of this Proposed Rule Change. The commenter also argues 
that NSCC should instead eliminate risk by shortening the settlement 
cycle, rather than monetizing risk through increased margin 
requirements, such as under this Proposed Rule Change. See Alpine 
Letter, supra note 4, at 7-8. However, the Proposed Rule Change is 
limited to NSCC's minimum Required Fund Deposit amount in order to 
manage risk under the current settlement cycle. Therefore, the 
commenter's arguments related to shortening the settlement cycle are 
likewise outside the scope of this Proposed Rule Change.
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B. Consistency With Section 17A(b)(3)(I) of the Act

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency do not impose any burden on competition not necessary 
or appropriate in furtherance of the Act.\48\ This provision does not 
require the Commission to find that a proposed rule change represents 
the least anti-competitive means of achieving the goal.\49\ Rather, it 
requires the Commission to balance the competitive considerations 
against other relevant policy goals of the Act.\50\
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    \48\ 15 U.S.C. 78q-1(b)(3)(I).
    \49\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105 
(D.C. Cir. 1978) (``Bradford'').
    \50\
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    The Commission acknowledges that the impact of increased margin 
requirements will likely present higher costs to some Members with 
lower operating margins, lower cash reserves or higher costs of capital 
compared to other Members, which may weaken those Members' competitive 
positions relative to others. For example, certain smaller Members 
could be required to make and hold an additional deposit of up to 
$240,000 to the Clearing Fund, which would limit the smaller Member's 
ability to utilize that cash for other operating or investing purposes. 
Although some of NSCC's Members could experience a burden on 
competition because of these higher costs, the Commission concludes any 
burden to these Members is necessary and appropriate in furtherance of 
the policy goals under the Act \51\ for the following reasons.
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    \51\ 15 U.S.C. 78q-1(b)(3)(I). Specifically, as discussed in 
greater detail in Section III.C and III.D below, the Proposed Rule 
Change is necessary and appropriate to further the policy goals 
under Rule 17Ad-22(e)(4)(i) and (e)(6)(iii). 17 CFR 240.17Ad-
22(e)(4)(i) and (e)(6)(iii).
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    As discussed in Section II.A above, NSCC seeks to maintain 
sufficient resources (i.e., margin) to cover its credit exposures to 
its Members fully with a high degree of confidence. Conversely, NSCC 
uses backtesting to determine when a Member's margin would have been 
insufficient to cover NSCC's credit exposure to that Member.\52\ As 
previously discussed, the Impact Study Results show the proposed 
$250,000 minimum Required Fund Deposit would have decreased the number 
of backtesting deficiencies, thereby increasing the number of Members 
for which NSCC maintained sufficient coverage at a confidence level of 
at least 99%.\53\ Therefore, the Proposed Rule Change would enable NSCC 
to better manage its credit exposure to its Members by ensuring it 
holds sufficient collateral to cover that exposure, thereby reducing 
the likelihood that NSCC or non-defaulting Members would incur losses 
resulting from a Member default.
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    \52\ See supra text accompanying notes 12-15.
    \53\ See supra text accompanying note 44. See also, supra text 
accompanying notes 29-31.
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    Additionally, based on the information set forth in Section II.B 
above regarding the average ENC of the impacted Members,\54\ the 
Commission believes that the vast majority of impacted Members likely 
would not experience a weakened competitive position compared to others 
as a result of the Proposed Rule Change. The average ENC data shows 
that almost all of the impacted Members would likely be able to satisfy 
the additional cash deposits needed to comply with the Proposed Rule 
Change with minimal impact to the Members' financials.\55\
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    \54\ See supra notes 34-37 and accompanying text. 98% of the 
impacted Members had, on average, an ENC above $2.5 million. 
Therefore, on average, 2% of the 46 impacted Members would maintain 
ENC below $2.5 million, which equals approximately one Member who 
could be required to hold 9.6% or more of its ENC on deposit at 
NSCC.
    \55\ NSCC represents it would continue to require that Members 
pay an amount equal to the minimum Required Fund Deposit amount in 
cash. See Notice of Filing, supra note 3, at 26590.
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    Commenters have raised concerns regarding the Proposed Rule Change 
in light of its potential competitive impact on certain NSCC Members. 
Specifically, one commenter objects to the proposed increase to 
$250,000, stating that NSCC's current Rules are more than adequate to 
guard against risk at the small firm-level and that the increase would 
be purely a tax on the smallest, inactive and lowest risk firms.\56\ 
Another commenter similarly objects to the proposed change stating the 
increase would disproportionately affect NSCC's smallest Members.\57\ 
The Commission disagrees for the reasons discussed above, which 
indicate that the proposed increase would increase Members' Required 
Fund Deposits proportional to the risks posed by those Members.
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    \56\ See Wachtel Letter, supra note 5.
    \57\ The commenter concludes the Proposed Rule Change will 
``undoubtedly put some members out of business.'' See Alpine Letter, 
supra note 4, at 5. Based on its consideration of the ENC data, as 
discussed above, the Commission does not agree with the commenter's 
argument. See supra text accompanying notes 51-52.
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    Moreover, as discussed in Section II.A above, it is possible that, 
in certain circumstances, the current minimum Required Fund Deposit 
amount would

[[Page 46046]]

be insufficient to manage NSCC's credit exposure to participants 
between margin collections should, for example, the Member's clearing 
activity abruptly increase.\58\ As summarized in Section II.B above, 
the Impact Study Results show that approximately 88% of the 
deficiencies that occurred on the days when Members maintained a 
Required Fund Deposit of less than $250,000 would have been eliminated, 
which indicates the proposed increase to $250,000 would have mitigated 
this risk.\59\ Seven of the 28 Members that would have to provide some 
additional funding still held an average actual clearing fund deposit 
of above $250,000 during the Impact Study Period, ranging from 
approximately $315,000 to $1.7M. In other words, there would have been 
many days during the study period where those seven Members would not 
have to provide additional funding. Additionally, four of the remaining 
21 Members that would have to provide some additional funding had an 
average ENC below $5 million, ranging from $834,000 to $4.8 million, 
during the Impact Study Period, while 11 of the 21 Members had an 
average ENC above $100 million during the same period.
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    \58\ See supra text accompanying notes 17-19.
    \59\ See supra text accompanying note 29.
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    For those 28 Members, the number of backtesting deficiencies ranged 
from zero and 22 based on the $10,000 minimum Required Fund Deposit 
compared to zero and five had the $250,000 minimum Required Fund 
Deposit been in place during the Impact Study Period. Moreover, the 
average number of backtesting deficiencies of the 28 Members would have 
decreased from 1.54 to 0.41 per Member had the $250,000 minimum 
Required Fund Deposit been in place during the study period. For the 14 
Members impacted with backtesting deficiencies, the largest deficiency 
was $1.3 million and the smallest deficiency was $11,000 (out of 50 
total deficiencies). Under the proposed minimum Required Fund Deposit 
of $250,000, there would only be six deficiencies across four members, 
with a maximum deficiency of $1.1 million and a minimum deficiency of 
$11,000.
    One commenter further states that it would not object to an 
increase to a $100,000 Required Fund Deposit. However, as discussed in 
Section II.B above, an increase to $250,000 compared to $100,000 would 
have further reduced NSCC's credit exposure to its Members by 
eliminating ten additional backtesting deficiencies resulting in NSCC 
maintaining sufficient margin levels for two additional Members to 
above the 99% confidence interval. Therefore, the Commission concludes 
that any competitive burden to Members imposed by the Proposed Rule 
Change is necessary and appropriate in furtherance of the Act. 
Accordingly, the Commission finds that the Proposed Rule Change is 
consistent with the requirements of Section 17A(b)(3)(I) of the 
Act.\60\
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    \60\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Consistency With Rule 17Ad-22(e)(4)(i)

    Rule 17Ad-22(e)(4)(i) requires that NSCC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively identify, measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes, including by maintaining sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence.\61\
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    \61\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above in Section II.A, NSCC and its non-defaulting 
Members may be subject to losses should a defaulted Member's own 
Required Fund Deposit be insufficient to satisfy losses caused by the 
liquidation of that Member's portfolio. As summarized in Section II.B 
above,\62\ the Impact Study Results show a $250,000 minimum Required 
Fund Deposit would have decreased the number of backtesting 
deficiencies, which would likely help NSCC better manage its credit 
exposure to each of its Members and credit exposures arising from its 
payment, clearing, and settlement processes.
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    \62\ See supra text accompanying notes 29-32.
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    Additionally, as discussed in Sections II.A and III.B above, NSCC 
would continue to require that Members pay an amount equal to the 
minimum Required Fund Deposit amount in cash,\63\ which should enable 
NSCC to better maintain sufficient prefunded margin to mitigate 
potential future exposures to its Members. Therefore, requiring the 
proposed minimum $250,000 deposit to be made in cash should reduce the 
probability that NSCC or non-defaulting Members would incur losses 
resulting from a Member default. Accordingly, the Commission finds that 
NSCC's proposed increase to its minimum Required Fund Deposit would be 
consistent with Rule 17Ad-22(e)(4)(i).\64\
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    \63\ See supra note 52. See also, Notice of Filing, supra note 
3, at 26590.
    \64\ 17 CFR 240.17Ad-22(e)(4)(i).
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D. Consistency with Rule 17Ad-22(e)(6)(iii)

    Rule 17Ad-22(e)(6)(iii) under the Act requires that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, calculates margin sufficient to cover its 
potential future exposure to Members in the interval between the last 
margin collection and the close out of positions following a Member 
default.\65\
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    \65\ 17 CFR 240.17Ad-22(e)(6)(iii).
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    As summarized in Section III.B above,\66\ NSCC employs daily 
backtesting to determine the adequacy of each Member's Required Fund 
Deposit paying particular attention to Members that have backtesting 
deficiencies below the 99% confidence target.\67\ Such backtesting 
deficiencies highlight exposure that could subject NSCC to potential 
losses if a Member defaults.
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    \66\ See supra text accompanying note 49.
    \67\ See supra text accompanying notes 16-18.
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    Based on the Impact Study Results, which the Commission has 
reviewed and analyzed, approximately 22% of all backtesting 
deficiencies occur for those Members that maintain a Required Fund 
Deposit of less than $250,000, and approximately 88% of the 
deficiencies of those Members would have been eliminated during the 
Impact Study Period if the Required Fund Deposit were $250,000 or 
higher. By raising the minimum Required Fund Deposit amount to 
$250,000, the Commission believes the proposal could enable NSCC to 
decrease the number of backtesting deficiencies by Members, and thus 
decrease NSCC's exposure to such Members in the event of a Member 
default.
    Additionally, based on the Commission's review and analysis of the 
Impact Study Results, the proposed $250,000 minimum Required Fund 
Deposit amount would have decreased the number of repeat backtesting 
deficiencies during the study period, which would have decreased the 
number of Members whose margin levels during the study period fell 
below the 99% confidence target.\68\ Therefore, by raising the minimum 
Required Fund Deposit amount to $250,000, the Commission concludes that 
the increase in margin for NSCC Members that currently maintain a 
Required Fund Deposit of less than $250,000 would improve the 
probabilities that the

[[Page 46047]]

margin maintained by these Members is sufficient to cover NSCC's 
potential future exposure to Members in the interval between the last 
margin collection and the close out of positions following a Member 
default.
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    \68\ See supra text accompanying notes 29-31. See also, supra 
text accompanying notes 17-19.
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    One commenter states the increase in margin is unwarranted because 
NSCC's Clearing Fund backtesting results from the Impact Study Results 
show that NSCC's current minimum Required Fund Deposit amount is 
sufficient to cover the risks presented by smaller Members.\69\ As 
summarized in Section II.B above, the Impact Study Results show that 
the proposed $250,000 minimum requirement would have increased NSCC's 
twelve-month rolling Clearing Fund coverage by 0.14% to 99.41% 
resulting from decreased backtesting deficiencies, which the commenter 
argues does not warrant the proposed increase in the minimum Required 
Fund Deposit amount. However, as discussed above and based on the 
Commission's review, the Impact Study Results show that certain Members 
who maintained Required Fund Deposits of less than $250,000 experienced 
repeat backtesting deficiencies that resulted in those Members' 
individual margin levels falling below the 99% confidence level. In 
other words, these Members' individual margin levels were not 
sufficient 99% of the time during the study period. For that reason, 
the Commission is not persuaded by the commenter's argument.
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    \69\ See Alpine Letter, supra note 4, at 5-6.
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    Therefore, the Commission concludes NSCC's Proposed Rule Change 
should better ensure NSCC maintains sufficient margin to cover its 
potential future exposure to its Members in the interval between the 
last margin collection and the close out of positions following a 
Member default, thereby reducing the likelihood NSCC or non-defaulting 
Members would incur losses as a result. Accordingly, the Commission 
finds that NSCC's proposed increase to its minimum Required Fund 
Deposit would be consistent with Rule 17Ad-22(e)(6)(iii).\70\
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    \70\ 17 CFR 240.17Ad-22(e)(6)(iii).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Partial Amendment No. 1, is consistent with the 
Exchange 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 rule-comments@sec.gov. Please include 
File Number SR-NSCC-2021-005 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-2021-005. 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 such filing also will be available for inspection 
and copying at the principal office of NSCC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NSCC-2021-005 and should be submitted on 
or before September 7, 2021.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Partial Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\71\ to approve the proposed rule change prior to the 
30th day after the date of publication of Partial Amendment No. 1 in 
the Federal Register. As discussed above, in Partial Amendment No. 1, 
NSCC updates its proposed rule text to include a legend to indicate a 
delayed implementation date, specifically that the rule change would be 
implemented no later than 20 business days after Commission approval of 
the Proposed Rule Change. Partial Amendment No. 1 improves the 
efficiency of the filing process by obviating the need for NSCC to 
propose another change to its rules to resolve the omitted legend in 
the future, while not changing the purpose of or basis for the Proposed 
Rule Change.
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    \71\ 15 U.S.C. 78s(b)(2).
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    For similar reasons as discussed above, the Commission finds that 
Partial Amendment No. 1 is consistent with the requirement that NSCC's 
rules be designed, in part, 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 under Section 17A(b)(3)(F) of the Exchange 
Act.\72\ Accordingly, the Commission finds good cause for approving the 
Proposed Rule Change, as modified by Partial Amendment No. 1, on an 
accelerated basis, pursuant to Section 19(b)(2) of the Exchange 
Act.\73\
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    \72\ 15 U.S.C. 78q-1(b)(3)(F).
    \73\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \74\ and 
the rules and regulations promulgated thereunder.
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    \74\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\75\ that Proposed Rule Change SR-NSCC-2021-005, as modified by Partial 
Amendment No. 1, be, and hereby is, approved.\76\
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    \75\ 15 U.S.C. 78s(b)(2).
    \76\ In approving the Proposed Rule Change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f). See discussion supra Section 
III.B.
    \77\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\77\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17541 Filed 8-16-21; 8:45 am]
BILLING CODE 8011-01-P