Document ID: SEC-2021-1730-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp
Posted Date: 2021-12-10T05:00Z

[Federal Register Volume 86, Number 235 (Friday, December 10, 2021)]
[Notices]
[Pages 70548-70551]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-26714]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93722; File No. SR-NSCC-2021-015]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed 
Rule Change To Remove Mutual Fund Deposit Requirements and Remove 
Certain Other Provisions Relating to Clearing Fund Requirements for 
Limited Members From the NSCC Rules

December 6, 2021.
    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 December 2, 2021, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the clearing agency. 
NSCC filed the proposed rule change pursuant to Section 19(b)(3)(A) \3\ 
of the Act and subparagraph (f)(4) \4\ of Rule 19b-4 thereunder. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    (a) The proposed rule change of National Securities Clearing 
Corporation (``NSCC'') is annexed hereto as Exhibit 5 and consists of 
modifications to NSCC's Rules & Procedures (the ``Rules'') \5\ to 
remove the requirement that Members and Mutual Fund/Insurance Services 
Members pay a Mutual Fund Deposit into the Clearing Fund relating to 
Mutual Fund Services, remove provisions relating to the Mutual Fund 
Deposit and the Insurance Deposit and remove a provision relating to 
establishing a Clearing Fund requirement for NSCC Members \6\ that 
currently do not have a Clearing Fund requirement. The proposed changes 
are described in greater detail below.
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    \5\ Capitalized terms not defined herein are defined in the 
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
    \6\ Members and Limited Members are collectively referred to 
herein as ``NSCC Members''.
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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
    The proposed rule change consists of modifications the Rules to 
remove the requirement that Members and Mutual Fund/Insurance Services 
Members pay a Mutual Fund Deposit into the Clearing Fund relating to 
Mutual Fund Services, remove provisions relating to the Mutual Fund 
Deposit and the Insurance Deposit and remove a provision relating to 
establishing a Clearing Fund requirement for NSCC Members that 
currently do not have a Clearing Fund requirement. The proposed changes 
are described in greater detail below.
(i) Mutual Fund Deposit
    As part of its market risk management strategy, NSCC manages its 
credit exposure to NSCC Members by determining the appropriate deposits 
to the Clearing Fund and monitoring Clearing Fund's sufficiency, as 
provided for in the Rules.\7\ The deposits to the Clearing Fund serves 
as each NSCC Member's margin. The objective of an NSCC Member's deposit 
is to mitigate potential losses to NSCC associated with a default by an 
NSCC Member. Pursuant to the Rules, each NSCC Member's Clearing Fund 
deposit amount consists of a number of applicable components, each of 
which is calculated to address specific risks faced by NSCC, as

[[Page 70549]]

identified within Procedure XV.\8\ One of the required components is a 
``Mutual Fund Deposit'' that is required to be paid by Mutual Fund/
Insurance Services Members and Members that use Mutual Fund Services 
and which is intended to address risks relating to the use of Mutual 
Fund Services.\9\
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    \7\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters) (``Procedure XV''), supra note 5. 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).
    \8\ Procedure XV, supra note 5.
    \9\ See Section 13 of Rule 4, supra note 5.
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    Section 13 of Rule 4 requires that Mutual Fund/Insurance Services 
Members and Members that use Mutual Fund Services each make a cash 
deposit to the Clearing Fund, referred to as a Mutual Fund Deposit, in 
the amounts determined in Procedure XV.\10\ Section I.(A)(4) of 
Procedure XV requires that each Member that uses Mutual Fund Services 
pay a Mutual Fund Deposit ranging from $5,000 to $20,000 based on the 
amount of Mutual Fund Services settlement debits such Member has with 
respect to any one Fund Member.\11\ Section I.(C) of Procedure XV 
requires that each Mutual Fund/Insurance Services Member also pay a 
Mutual Fund Deposit ranging from $5,000 to $20,000 based on the amount 
of Mutual Fund Services settlement debits such Mutual Fund/Insurance 
Services Member has with respect to any one Fund Member.\12\
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    \10\ Id.
    \11\ Section I.(A)(4) of Procedure XV, supra note 5.
    \12\ Section I.(C) of Procedure XV, supra note 5.
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    The risk that the Mutual Fund Deposit is intended to address is a 
loss incurred by NSCC relating to a default by a Member or Mutual Fund/
Insurance Services Member using Mutual Fund Services. Mutual Fund 
Services is a ``non-guaranteed'' service of NSCC, which means that NSCC 
does not guarantee the payments at settlement for transactions 
processed through Mutual Fund Services.\13\ In the event of an NSCC 
Member default, transactions processed through Mutual Fund Services by 
that NSCC Member may be reversed, including any credits owed to any 
counterparties with respect to such transactions.\14\ Therefore, a loss 
to NSCC could only occur with respect to transactions in Mutual Fund 
Services if an NSCC Member defaults on payment, NSCC makes a decision 
to proceed with settlement despite the default and pay the credits to 
the counterparties and then subsequently NSCC is unable to recover the 
funds from either the defaulting NSCC Member or the counterparties. 
Such a situation is referred to as a ``double default''. NSCC put the 
Mutual Fund Deposit requirement in place to address the remote risk of 
loss related to a double default in connection with Mutual Fund 
Services transactions.\15\
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    \13\ See Addendum D of the Rules, supra note 5.
    \14\ Id.
    \15\ See Securities Exchange Release No. 26377 (December 20, 
1988) (SR-NSCC-87-12), 53 FR 52546 (December 28, 1988).
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    NSCC regularly assesses its margining methodologies to evaluate 
whether margin levels are commensurate with the particular risk 
attributes of each relevant product, portfolio, and market. In 
connection with such reviews, NSCC has determined that the Mutual Fund 
Deposit is not necessary to address the risks relating to transactions 
in Mutual Fund Services by Members and Mutual Fund/Insurance Services 
Members. The risk of an NSCC loss relating to Mutual Fund Services 
transactions is remote. As discussed above, upon a default by a Member 
or a Mutual Fund/Insurance Services Member related to Mutual Fund 
Services transactions, for NSCC to incur a loss, NSCC would need to 
make a decision to not reverse the Mutual Fund Services transactions 
and pay the credits to the counterparties. While it is possible that 
NSCC could make such a decision, for instance in order to minimize 
operational risks and market impacts, it would likely only do so if it 
was certain that it could recover the amounts of the credits it decided 
to pay. In addition, since those payments can be reversed, once those 
payments were made, NSCC could look to both the defaulting NSCC Member 
and the counterparties that received the credit payments to recover 
those losses. NSCC has never needed to use Mutual Fund Deposits to 
recover a loss and has never incurred a loss relating to an NSCC Member 
defaulting on Mutual Fund Services transaction payments.
    In addition, the amounts of the Mutual Fund Deposits no longer 
correlate with most of the settlement amounts in Mutual Fund Services. 
The current requirements for the Mutual Fund Deposits, from $5,000 to 
$20,000, has not changed since the Mutual Fund Deposit was implemented 
in 1988.\16\ In the remote circumstance where NSCC did incur a loss 
relating to Mutual Fund Services, the amounts of the Mutual Fund 
Deposits would not likely cover the amount of such losses.
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    \16\ Id.
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    Therefore, NSCC is proposing to remove the requirement that Members 
that use Mutual Fund Services and Mutual Fund/Insurance Services 
Members pay the Mutual Fund Deposit.
(ii) Mutual Fund Deposit/Insurance Deposit Provisions
    In addition to the provisions requiring Members and Mutual Fund/
Insurance Services to pay a Mutual Fund Deposit, Section 13 of Rule 4 
contains provisions stating that Fund Members may be required to make a 
Mutual Fund Deposit in accordance with Procedure XV and other 
applicable Rules and Procedures.\17\ Section 14 of Rule 4 has a similar 
provision stating that Insurance Participants may be required to pay an 
Insurance Deposit in accordance with Procedure XV and other applicable 
Rules and Procedures.\18\
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    \17\ Section 13 of Rule 4, supra note 5.
    \18\ Section 14 of Rule 4, supra note 5.
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    Section 13 of Rule 4 and Section 14 of Rule 4 also contain other 
provisions relating to the use of the Mutual Fund Deposits and 
Insurance Deposits, including loss allocation provisions relating to 
the Mutual Fund Deposits and Insurance Deposits and provisions relating 
to the return of the Mutual Fund Deposit or Insurance Deposit to a 
Mutual Fund Participant or Insurance Participant, respectively, that 
withdraws from membership.
    NSCC has never placed a requirement in Procedure XV for Fund 
Members to pay a Mutual Fund Deposit or for Insurance Participants to 
pay an Insurance Deposit. Section I.(D) of Procedure XV states that the 
Clearing Fund Formula for each Fund Member, Insurance Carrier/
Retirement Services Member and those Mutual Fund/Insurance Services 
Members who use Insurance & Retirement Services shall be established at 
such time as NSCC deems appropriate, however, NSCC has never 
established a Clearing Fund Formula for such NSCC Members.\19\ In 
addition, NSCC currently does not plan to establish a Clearing Fund 
Formula for such NSCC Members.
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    \19\ See Section I.(D) of Procedure XV, supra note 5.
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    NSCC believes that the provisions relating to whether it may 
require an NSCC Member to pay a Mutual Fund Deposit or Insurance 
Deposit and that it shall establish a Clearing Fund Formula for Fund 
Members, Insurance Carrier/Retirement Services Members and Mutual Fund/
Insurance Services Members who use Insurance & Retirement Services are 
unnecessary and may be misleading since NSCC currently has no plans to 
establish such requirements. Given that NSCC would no longer be 
requiring Members and Mutual Fund/Insurance Services Members to pay a 
Mutual Fund Deposit and to avoid confusion relating to whether any 
other NSCC Members would be required to pay a Mutual Fund Deposit or an 
Insurance Deposit, NSCC is proposing to delete the provisions

[[Page 70550]]

relating to Mutual Fund Deposits, Insurance Deposits and statements 
relating to whether NSCC shall establish a Clearing Fund Formula for 
Fund Members, Insurance Carrier/Retirement Services Members and Mutual 
Fund/Insurance Services Members who use Insurance & Retirement 
Services.
(ii) Proposed Rule Changes
    NSCC is proposing to delete the definitions of Insurance Deposit 
and Mutual Fund Deposit in Rule 1 and delete Sections 13 and 14 of Rule 
4 to remove the provisions relating to Mutual Fund Deposits and 
Insurance Deposits. NSCC is also proposing to delete Section I.(A)(4) 
of Procedure XV to remove the requirement that Members that use Mutual 
Fund Services pay a Mutual Fund Deposit and delete Section I.(C) of 
Procedure XV to remove the requirement that Mutual Fund/Insurance 
Services Members pay a Mutual Fund Deposit. NSCC would also delete 
Section I.(D) of Procedure XV to remove the statement that NSCC shall 
establish a Clearing Fund Formula for Fund Members, Insurance Carrier/
Retirement Services Members and those Mutual Fund/Insurance Services 
Members who use Insurance & Retirement Services.
(iii) Implementation
    NSCC expects to implement the proposed rule changes on or prior to 
January 31, 2022. As proposed, a legend would be added to Rule 1, Rule 
4 and Procedure XV stating there are changes that became effective upon 
filing with the Commission but have not yet been implemented. The 
proposed legends would also state the date by which such changes would 
be implemented, the file number of this proposal, that NSCC will issue 
an Important Notice when the changes are implemented, and would state 
that once this proposal is implemented the legend would automatically 
be removed.
2. Statutory Basis
    NSCC believes that the proposal is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
registered clearing agency. In particular, NSCC believes that the 
proposed rule changes are consistent with Section 17A(b)(3)(F) of the 
Act \20\ and Rule 17Ad22(e)(6)(i) under the Act.
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(F) of the Act \21\ requires, in part, that the 
Rules be designed to, among other things, remove impediments to and 
perfect the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions. The proposed 
revisions are consistent with this provision because the proposed 
revisions would remove a requirement to pay the Mutual Fund Deposit 
that NSCC has determined is not necessary to mitigate potential losses 
to NSCC associated with a default by an NSCC Member related to 
transactions in Mutual Fund Services. Removing the requirement of the 
Mutual Fund Deposits would allow Members and Mutual Fund/Insurance 
Services Members to use Mutual Fund Services without having to incur 
costs associated with making a Mutual Fund Deposit.
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    \21\ Id.
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    In addition, removing the references to the Mutual Fund Deposit and 
the Insurance Deposit and the references to establishing a Clearing 
Fund Formula for Fund Members, Insurance Carrier/Retirement Services 
Members and Mutual Fund/Insurance Services Members who use Insurance & 
Retirement Services would enhance the clarity of the Rules by removing 
provisions that are unnecessary and potentially misleading. Having 
clear and accurate Rules would help NSCC Members to better understand 
their rights and obligations regarding NSCC's services.
    As such, NSCC believes the proposed rule changes are 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)(6)(i) under the Act \23\ requires that NSCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\24\ NSCC has determined that the Mutual Fund Deposit is not 
necessary to address the risks relating to transactions in Mutual Fund 
Services by Members and Mutual Fund/Insurance Services Members. NSCC 
has never incurred a loss resulting from a default by an NSCC Member 
relating to transactions in Mutual Fund Services. In addition, for the 
reasons discussed above, the risk of NSCC occurring such a loss is 
remote and the amounts of the Mutual Fund Deposits are likely not 
sufficient to cover any such loss if such an unlikely event were to 
occur. Therefore, NSCC believes the proposed change is consistent with 
Rule 17Ad-22(e)(6)(i) under the Act.\25\
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    \23\ 17 CFR 240.17Ad-22(e)(6)(i).
    \24\ Id.
    \25\ 17 CFR 240.17Ad-22(e)(6)(iii).
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed changes would have an 
adverse impact, or impose a burden, on competition. These proposed 
changes would remove a requirement to pay the Mutual Fund Deposit for 
Mutual Fund/Insurance Services Members and Members that use Mutual Fund 
Services and would be removing provisions relating to the Mutual Fund 
Deposit and Insurance Deposit and clearing fund that NSCC believes are 
not necessary. The proposed changes would not be adding any obligations 
on NSCC Members that are using NSCC's services. As such, the proposed 
changes would not impede any NSCC Members from engaging in the services 
or have an adverse impact on any NSCC Members. Moreover, the proposed 
changes may promote competition because the proposed changes could 
enhance participation in Mutual Fund Services by removing the 
obligation to pay a Mutual Fund Deposit.

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

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

[[Page 70551]]

    NSCC reserves the right not to respond to any comments received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \26\ of the Act and paragraph (f) \27\ of Rule 19b-4 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \26\ 15 U.S.C 78s(b)(3)(A).
    \27\ 17 CFR 240.19b-4(f).
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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 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-2021-015 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-2021-015. 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 
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NSCC-2021-015 and should be submitted on 
or before January 3, 2022.
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    \28\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-26714 Filed 12-9-21; 8:45 am]
BILLING CODE 8011-01-P