Document ID: SEC-2021-1828-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2021-12-29T05:00Z

[Federal Register Volume 86, Number 247 (Wednesday, December 29, 2021)]
[Notices]
[Pages 74185-74198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-28250]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93856; File No. SR-NSCC-2021-016]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Enhance 
Capital Requirements and Make Other Changes

December 22, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on December 13, 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. 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 amendments to the Rules & 
Procedures (``Rules'') of NSCC in order to (i) enhance NSCC's capital 
requirements for Members and Limited Members (collectively, 
``members''), (ii) redefine NSCC's Watch List and eliminate NSCC's 
enhanced surveillance list, and (iii) make certain other clarifying, 
technical and supplementary changes in the Rules, including 
definitional updates, to accomplish items (i) and (ii), as described in 
greater detail below.\3\
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, available at http://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
    The purpose of this proposed rule change is to (i) enhance NSCC's 
capital requirements for Members and Limited Members (collectively, 
``members''), (ii) redefine NSCC's Watch List and eliminate NSCC's 
enhanced surveillance list, and (iii) make certain other clarifying, 
technical and supplementary changes in the Rules, including 
definitional updates, to accomplish items (i) and (ii).
(i) Background
    Central counterparties (``CCPs'') play a key role in financial 
markets by mitigating counterparty credit risk on transactions of their 
participants. CCPs achieve this by providing guaranties to participants 
and, as a consequence, are typically exposed to credit risks that could 
lead to default losses.
    As a CCP, NSCC is exposed to the credit risks of its members. The 
credit risks borne by NSCC are mitigated, in part, by the capital 
maintained by members, which serves as a loss-absorbing buffer.
    In accordance with Section 17A(b)(4)(B) of the Exchange Act,\4\ a 
registered clearing agency such as NSCC may, among other things, deny 
participation to, or condition the participation of, any person on such 
person meeting such standards of financial responsibility prescribed by 
the rules of the registered clearing agency.
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    \4\ 15 U.S.C. 78q-1(b)(4)(B).
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    In furtherance of this authority, NSCC requires applicants and 
members to meet the relevant financial responsibility standards 
prescribed by the Rules. These financial responsibility standards 
generally require members to have and maintain certain levels of 
capital, as more particularly described in the Rules and below.
    NSCC's capital requirements for its members have not been updated 
in over 20 years. Since that time, there have been significant changes 
to the financial markets that warrant NSCC revisiting its capital 
requirements. For example, the regulatory environment within which NSCC 
and its members operate has undergone various changes. The

[[Page 74186]]

implementation of the Basel III standards,\5\ the designation of many 
banks as systemically important by the Financial Stability Board,\6\ as 
well as the designation of NSCC as a systemically important financial 
market utility (``SIFMU'') by the Financial Stability Oversight 
Council,\7\ have significantly increased the regulatory requirements, 
including capital requirements, of many financial institutions and 
CCPs. Similarly, the Covered Clearing Agency Standards (``CCAS'') 
adopted by the Commission have raised the regulatory standards 
applicable to CCPs such as NSCC.\8\
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    \5\ Basel Committee on Banking Supervision, The Basel Framework, 
available at https://www.bis.org/basel_framework/index.htm?export=pdf (``Basel III Standards'').
    \6\ See Financial Stability Board, 2021 list of global 
systemically important banks, available at https://www.fsb.org/wp-content/uploads/P231121.pdf.
    \7\ See U.S. Department of the Treasury, Designations, Financial 
Market Utility Designations, available at https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations.
    \8\ 17 CFR 240.17Ad-22(e).
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    There also have been significant membership changes over the past 
20 years. Numerous mergers, acquisitions, and new market entrants have 
created a diverse NSCC membership that has expanded the credit-risk 
profiles that NSCC must manage. For example, NSCC has seen an increase 
in less capitalized market participants focusing on niche parts of the 
market with innovative new business models.
    Additionally, trading activity and market volatility, each of which 
present risk to NSCC, ballooned over the years.\9\ While NSCC does 
collect margin from its members to help address these types of risk, it 
is imperative that NSCC ensure that its members have sufficient capital 
to sustain unexpected and/or sustained increases in margin 
requirements. Although the above factors do not directly require NSCC 
to increase capital requirements for its membership (e.g., there is no 
specific regulation or formula that prescribes a set capital 
requirement for members of a CCP such as NSCC), the overarching and 
collective focus of the regulatory changes noted above, in light of the 
many heightened risks to the financial industry, has been to increase 
the stability of the financial markets in order to reduce systemic 
risk. As a self-regulatory organization, a SIFMU, and being exposed to 
the new and increased risks over the past 20 years, NSCC has a 
responsibility to do the same. Enhancing its capital requirements helps 
meet that responsibility and improve NSCC's credit risk management. 
Enhanced capital requirements also help mitigate other risks posed 
directly or indirectly by members such as legal risk, operational risk 
and cyber risk, as better capitalized members have greater financial 
resources in order to mitigate the effects of these and other risks.
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    \9\ See, e.g., DTCC Annual Reports, available at https://www.dtcc.com/about/annual-report. NSCC is a wholly owned subsidiary 
of The Depository Trust & Clearing Corporation (``DTCC''). The DTCC 
Annual Reports highlight and track NSCC clearing activity year-over-
year. See also CBOE Volatility Index (i.e., the VIX) available at 
https://www.cboe.com/tradable_products/vix/. The VIX is designed to 
measure market volatility, highlights a rollercoaster of volatility 
over the past 14 years, including historic and near-historic peaks.
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    As for setting the specific capital requirements proposed, again, 
there is no regulation or formula that requires or calculates a 
specific amount (i.e., there is no magic number). Instead, NSCC 
considered several factors, including inflation and the capital 
requirements of other Financial Market Infrastructures, both in the 
U.S. and abroad, to which the proposed requirements align.\10\ NSCC 
also gave much weight to the historical development of the proposal, 
which involved member outreach and feedback as far back as 2013.
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    \10\ See The Options Clearing Corporation, OCC Rules, Rule 
301(a), available at https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules (requiring broker-dealers 
to have initial net capital of not less than $2,500,000); Chicago 
Mercantile Exchange Inc., CME Rulebook, Rule 970.A.1, available at 
https://www.cmegroup.com/rulebook/CME/I/9/9.pdf (requiring clearing 
members to maintain capital of at least $5 million, with banks 
required to maintain minimum tier 1 capital of at least $5 billion); 
LCH SA, LCH SA Clearing Rule Book, Section 2.3.2, available at 
https://www.lch.com/resources/rulebooks/lch-sa (requiring, with 
respect to securities clearing, capital of at least EUR 10 million 
for self-clearing members and at least EUR 25 million for members 
clearing for others, subject to partial satisfaction by a letter of 
credit) (1 EUR = $0.8150 as of December 31, 2020; see https://www.fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange/current.html (last visited January 14, 2021)).
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    In 2013, NSCC considered increasing its minimal capital 
requirements for members that self-clear and those that clear for 
others to much higher, fixed amounts than what are proposed here. 
However, some members expressed concerns that the amounts were too high 
and rigid, and would present undue burden on less capitalized firms. As 
such, NSCC then considered lowering the amounts considerably, such that 
the amounts would more directly reflect inflation but with an 
adjustment factor related to volume activity. In response, though, 
members expressed concern over the volume adjustment, which NSCC also 
determined to be too challenging and costly to implement, and too 
complex to monitor for both NSCC and members. Ultimately, NSCC settled 
on the current proposal, which it believes strikes the right balance 
between continuing to provide access for less capitalized firms and the 
need to mitigate risk to NSCC and its members, as described in more 
detail below.
    NSCC also proposes to redefine the Watch List, which is a list of 
members that are deemed by NSCC to pose a heightened risk to it and its 
members based on credit ratings and other factors. As part of the 
redefinition of the Watch List, NSCC proposes to eliminate the separate 
enhanced surveillance list and implement a new Watch List that consists 
of a relatively smaller group of members that exhibit heightened credit 
risk, as described in more detail below.
    Finally, NSCC proposes to make certain other clarification changes 
in the Rules.
(ii) Current NSCC Capital Requirements
    The Rules currently specify capital requirements for members based 
on their membership type and type of entity. The current NSCC capital 
requirements for members are set forth in Addendum B (Qualifications 
and Standards of Financial Responsibility, Operational Capability and 
Business History),\11\ as supplemented by Addendum O (Admission of Non-
U.S. Entities as Direct NSCC Members) \12\ in the case of non-U.S. 
entities.
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    \11\ Addendum B (Qualifications and Standards of Financial 
Responsibility, Operational Capability and Business History), supra 
note 3.
    \12\ Addendum O (Admission of Non-U.S. Entities as Direct NSCC 
Members), supra note 3.
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Addendum B (Qualifications and Standards of Financial Responsibility, 
Operational Capability and Business History)
    Addendum B is divided into 12 sections, one for each NSCC 
membership type. Each section of Addendum B sets forth the 
qualifications, financial responsibility, operational capability and 
business history requirements applicable to the relevant membership 
type.
    An applicant for a membership type is required to meet the 
qualifications, financial responsibility, operational capability and 
business history requirements applicable to the relevant membership 
type, which may vary based on the applicant's type of entity (e.g., a 
broker-dealer vs. a bank or trust company). In particular, financial 
responsibility requirements for a membership type, which generally 
require the applicant to maintain a certain level of capital, may vary 
based on an applicant's type of entity and the

[[Page 74187]]

relevant capital measure for such type of entity.
    As relevant to NSCC's proposal to enhance its capital requirements 
for members:
Section 1
    Section 1 of Addendum B sets forth the qualifications, financial 
responsibility, operational capability and business history 
requirements applicable to Members. The financial responsibility 
requirements in Section 1 consist of the following capital 
requirements:
    Section 1.B.1 of Addendum B provides that a Registered Broker-
Dealer applying to be a Member must have excess net capital (i.e., 
capital in excess of the minimum net capital required by the Commission 
or such higher minimum capital required by its designated examining 
authority) in the amount of $500,000 if the Registered Broker-Dealer 
does not clear for others or $1 million if the Registered Broker-Dealer 
clears for others.
    An applicant that is a Municipal Securities Brokers' Brokers (as 
defined in Rule 15c3-1(a)(8) under the Exchange Act) \13\ is subject to 
a lower excess net capital requirement of $100,000.
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    \13\ 17 CFR 240.15c3-1(a)(8).
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    Section 1.B.2 of Addendum B provides that a bank applying to be a 
Member must (i) have at least $50 million in equity capital (as defined 
on the Consolidated Report of Condition and Income (``Call Report'')) 
or (ii) have furnished to NSCC a guarantee of its parent bank holding 
company respecting the payment of any and all obligations of the bank 
applicant, and such parent bank holding company must have total 
consolidated capital of at least $50 million.
    In the case of a trust company applying to be a Member that is not 
a bank but is a member of the Federal Reserve System or is an 
institution insured under the Federal Deposit Insurance Act, the trust 
company must have consolidated capital of at least $10 million and that 
is adequate to the scope and character of the business conducted by 
such trust company.
    Section 1.B.3 of Addendum B provides that an entity applying to be 
a Member other than a Registered Broker-Dealer, bank or trust company 
is required to satisfy such minimum standards of financial 
responsibility as determined by NSCC.
Section 2
    Section 2 of Addendum B sets forth the qualifications, financial 
responsibility, operational capability and business history 
requirements applicable to Mutual Fund/Insurance Services Members. The 
financial responsibility requirements in Section 2 consist of the 
following capital requirements:
    Section 2.B.1 of Addendum B provides that a Registered Broker-
Dealer applying to be a Mutual Fund/Insurance Services Member must have 
excess net capital in the amount of $50,000.
    Section 2.B.2 of Addendum B provides that a bank or trust company 
applying to be a Mutual Fund/Insurance Services Member must (i) have a 
Tier 1 Risk Based Capital (``RBC'') ratio of 6% or greater or (ii) with 
respect to trust companies which do not calculate a Tier 1 RBC ratio, 
have at least $2 million in equity capital.
    Section 2.B.3 of Addendum B provides that an Insurance Company 
applying to be a Mutual Fund/Insurance Services Member must have an RBC 
ratio, as derived from annual statutory financial statements filed by 
it with its supervisory or regulatory entity (or, between filings of 
such annual statutory financial statements, an RBC ratio derived in a 
similar manner from then-current financial data), of 250% or greater.
    Section 2.B.4 of Addendum B provides that an entity applying to be 
a Mutual Fund/Insurance Services Member other than a Registered Broker-
Dealer, bank or trust company or Insurance Company is required to 
satisfy such minimum standards of financial responsibility as 
determined by NSCC.
Section 3
    Section 3 of Addendum B sets forth the qualifications, financial 
responsibility, operational capability and business history 
requirements applicable to Fund Members. The financial responsibility 
requirements in Section 3 consist of the following capital 
requirements:
    Section 3.B.1 of Addendum B provides that a Registered Broker-
Dealer applying to be a Fund Member must have excess net capital in the 
amount of $50,000.
    Section 3.B.2 of Addendum B provides that a bank or trust company 
applying to be a Fund Member must (i) have a Tier 1 RBC ratio of 6% or 
greater or (ii) with respect to trust companies which do not calculate 
a Tier 1 RBC ratio, have at least $2 million in equity capital.
    Section 3.B.3 of Addendum B provides that an investment company 
applying to be a Fund Member must have at least $100,000 in assets 
under management.
    Section 3.B.4 of Addendum B provides that an investment adviser 
applying to be a Fund Member must have at least $25,000,000 in assets 
under management and $100,000 in total net worth.
    Section 3.B.5 of Addendum B provides that an Insurance Company 
applying to be a Fund Member must have an RBC ratio, as derived from 
annual statutory financial statements filed by it with its supervisory 
or regulatory entity (or, between filings of such annual statutory 
financial statements, an RBC ratio derived in a similar manner from 
then-current financial data), of 250% or greater.
    Section 3.B.6 of Addendum B provides that an entity applying to be 
a Fund Member other than a Registered Broker-Dealer, bank or trust 
company, investment company, investment adviser or Insurance Company is 
required to satisfy such minimum standards of financial responsibility 
as determined by NSCC.
Section 4
    Section 4 of Addendum B sets forth the qualifications, financial 
responsibility, operational capability and business history 
requirements applicable to Insurance Carrier/Retirement Services 
Members. The financial responsibility requirements in Section 4 consist 
of the following capital requirement:
    Section 4.B of Addendum B provides that an Insurance Company 
applying to be an Insurance Carrier/Retirement Services Member must 
have an RBC ratio, as derived from annual statutory financial 
statements filed by it with its supervisory or regulatory entity (or, 
between filings of such annual statutory financial statements, an RBC 
ratio derived in a similar manner from then-current financial data), of 
250% or greater.
Section 7
    Section 7 of Addendum B sets forth the qualifications, financial 
responsibility and operational capability requirements applicable to 
Settling Bank Only Members. The financial responsibility requirements 
in Section 7 consist of the following capital requirement:
    Section 7.B of Addendum B provides that a bank or trust company 
applying to be a Settling Bank Only Member is required to satisfy such 
minimum standards of financial responsibility as determined by NSCC.

[[Page 74188]]

Addendum O (Admission of Non-U.S. Entities as Direct NSCC Members)
    Addendum O (Admission of Non-U.S. Entities as Direct NSCC Members) 
provides that an entity that is organized in a country other than the 
United States and that is not otherwise subject to U.S. federal or 
state regulation (a ``non-U.S. entity'') is eligible to become a 
Member, Mutual Fund/Insurance Services Member, Fund Member or Insurance 
Carrier/Retirement Services Member, subject to certain conditions.
    One of the conditions for a non-U.S. entity to be admitted as a 
Member, Mutual Fund/Insurance Services Member, Fund Member or Insurance 
Carrier/Retirement Services Member is that the entity must provide 
NSCC, for financial monitoring purposes, audited financial statements 
prepared in accordance with either U.S. generally accepted accounting 
principles (``U.S. GAAP'') or other generally accepted accounting 
principles that are satisfactory to NSCC.
    In order to address the risk presented by the acceptance of 
financial statements not prepared in accordance with U.S. GAAP, 
Addendum O provides that the minimum financial requirements applicable 
to a non-U.S. entity will be subject to a specified premium, as 
follows:
    i. For financial statements prepared in accordance with 
International Financial Reporting Standards, the U.K. Companies Act of 
1985 (``U.K. GAAP''), or Canadian generally accepted accounting 
principles--a premium of 1\1/2\ times the minimum financial 
requirements;
    ii. for financial statements prepared in accordance with a European 
Union country's generally accepted accounting principles, other than 
U.K. GAAP--a premium of 5 times the minimum financial requirements; and
    iii. for financial statements prepared in accordance with any other 
type of generally accepted accounting principles--a premium of 7 times 
the minimum financial requirements.
    Accordingly, a non-U.S. entity that does not prepare its financial 
statements in accordance with U.S. GAAP is required to meet financial 
requirements between 1\1/2\ to 7 times the minimum financial 
requirements that would otherwise be applicable to the non-U.S entity. 
Given that, as noted above, the financial responsibility requirements 
generally require a member to have a certain level of capital, Addendum 
O has the effect of requiring a non-U.S. entity that does not prepare 
its financial statements in accordance with U.S. GAAP to have capital 
between 1\1/2\ to 7 times the otherwise-applicable capital requirement.
(iii) Current NSCC Watch List and Enhanced Surveillance List
    NSCC's Watch List is a list of members that are deemed by NSCC to 
pose a heightened risk to it and its members based on credit ratings 
and other factors.\14\
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    \14\ See Rule 1 (Definitions and Descriptions), supra note 3.
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    Specifically, the Watch List is the list of Members with credit 
ratings derived from NSCC's Credit Risk Rating Matrix (``CRRM'') \15\ 
of 5, 6 or 7, as well as members that, based on NSCC's consideration of 
relevant factors, including those set forth in Section 4(d) of Rule 2B 
(Ongoing Membership Requirements and Monitoring),\16\ are deemed by 
NSCC to pose a heightened risk to it and its members.
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    \15\ NSCC's CRRM is a matrix of credit ratings of Members 
specified in Section 4 of Rule 2B. The CRRM is developed by NSCC to 
evaluate the credit risk Members pose to NSCC and its Members and is 
based on factors determined to be relevant by NSCC from time to 
time, which factors are designed to collectively reflect the 
financial and operational condition of a Member. These factors 
include (i) quantitative factors, such as capital, assets, earnings, 
and liquidity, and (ii) qualitative factors, such as management 
quality, market position/environment, and capital and liquidity risk 
management. See Rule 1 (Definitions and Descriptions), supra note 3.
    \16\ Rule 2B (Ongoing Membership Requirements and Monitoring), 
Section 4 (Ongoing Monitoring), supra note 3.
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    In addition to the Watch List, NSCC also maintains a separate list 
of members subject to enhanced surveillance in accordance with the 
provisions of Rule 2B, as discussed below. The enhanced surveillance 
list is a list of members for which NSCC has heightened credit 
concerns, which may include members that are already, or may soon be, 
on the Watch List. As described below, a member is subject to the same 
potential consequences from being subject to enhanced surveillance or 
being placed on the Watch List.
Rule 2B (Ongoing Membership Requirements and Monitoring)
    Rule 2B (Ongoing Membership Requirements and Monitoring) specifies 
the ongoing membership requirements and monitoring applicable to 
members.\17\
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    \17\ Rule 2B (Ongoing Membership Requirements and Monitoring), 
supra note 3.
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    Section 2.B.(e) of Rule 2B provides that NSCC may review the 
financial responsibility and operational capability of a Member and 
otherwise require from the Member additional reporting of its financial 
or operational condition in order to make a determination as to whether 
such Member should be placed on the Watch List and/or be subject to 
enhanced surveillance by NSCC consistent with the provisions of Section 
4 of Rule 2B.
    Section 4(b) of Rule 2B provides that a Member that is (1) a U.S. 
bank or trust company that files a Call Report, (2) a U.S. broker-
dealer that files the Financial and Operational Combined Uniform Single 
Report (``FOCUS Report'') or the equivalent with its regulator, or (3) 
a non-U.S. bank or trust company that has audited financial data that 
is publicly available, will be assigned a credit rating by NSCC in 
accordance with the CRRM. A Member's credit rating is reassessed each 
time the Member provides NSCC with requested information pursuant to 
Section 2.B.(e) of Rule 2B or as may be otherwise required under the 
Rules.
    Section 4(b) further provides that because the factors used as part 
of the CRRM may not identify all risks that a Member assigned a credit 
rating by NSCC may present to NSCC, NSCC may, in its discretion, 
override such Member's credit rating derived from the CRRM to downgrade 
the Member. This downgrading may result in the Member being placed on 
the Watch List and/or it may subject the Member to enhanced 
surveillance based on relevant factors.
    Section 4(c) of Rule 2B provides that Members not assigned a credit 
rating by NSCC and Limited Members monitored and reviewed by NSCC on an 
ongoing and periodic basis will not be assigned a credit rating by the 
CRRM but may be placed on the Watch List and/or may be subject to 
enhanced surveillance based on relevant factors.
    Section 4(d) of Rule 2B provides that the factors to be considered 
by NSCC in determining whether a member is placed on the Watch List 
and/or subject to enhanced surveillance include (i) news reports and/or 
regulatory observations that raise reasonable concerns relating to the 
member, (ii) reasonable concerns around the member's liquidity 
arrangements, (iii) material changes to the member's organizational 
structure, (iv) reasonable concerns about the member's financial 
stability due to particular facts and circumstances, such as material 
litigation or other legal and/or regulatory risks, (v) failure of the 
member to demonstrate satisfactory financial condition or operational 
capability or if NSCC has a reasonable concern regarding the member's 
ability to maintain applicable membership standards, and (vi) failure 
of the member to provide information required by NSCC to assess risk 
exposure posed by the member's activity.

[[Page 74189]]

    Section 4(e) of Rule 2B provides that NSCC may require a member 
that has been placed on the Watch List to make and maintain a deposit 
to the Clearing Fund over and above the amount determined in accordance 
with Procedure XV (Clearing Fund Formula and Other Matters) (which 
additional deposit shall constitute a portion of the member's Required 
Fund Deposit) or such higher amount as NSCC may deem necessary for the 
protection of it or other members.
    Section 4(f) of Rule 2B provides that a member being subject to 
enhanced surveillance or being placed on the Watch List (1) will result 
in a more thorough monitoring of the member's financial condition and/
or operational capability, including on-site visits or additional due 
diligence information requests, and (2) may be required make more 
frequent financial disclosures to NSCC. Members and Limited Members 
that are placed on the Watch List or subject to enhanced surveillance 
are also reported to NSCC's management committees and regularly 
reviewed by NSCC senior management.
(iv) Proposed Rule Changes
A. Changes To Enhance NSCC's Capital Requirements
    As noted earlier, as a CCP, NSCC is exposed to the credit risks of 
its members. The credit risks borne by NSCC are mitigated, in part, by 
the capital maintained by members, which serves as a loss-absorbing 
buffer.
    NSCC's financial responsibility standards for members generally 
require members to have and maintain certain levels of capital.
    As described in more detail below, NSCC proposes to enhance its 
capital requirements for members as follows:
Members
U.S. Broker-Dealers
    NSCC proposes increasing minimum excess net capital (``Excess Net 
Capital'') requirements for Members that are U.S. broker-dealers using 
a tiered approach.\18\ These increases would be between 2 and 10 times 
the current minimum Excess Net Capital requirements applicable to 
Members that are U.S. broker-dealers, depending on whether the Member 
self-clears or clears for others and its VaR Tier, as described below. 
As described below, NSCC proposes to use, in general terms, 
calculations from its value-at-risk (``VaR'') model and associated 
Member charges as a measure of market risk in order to categorize 
Members into those that pose relatively minimal risk exposure, moderate 
risk exposure, or higher risk exposure to NSCC.
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    \18\ As part of the proposal, NSCC proposes to add the defined 
term ``Excess Net Capital'' to the list of defined terms in Rule 1. 
Excess Net Capital would be defined as a broker-dealer's excess net 
capital, calculated in accordance with such broker-dealer's 
regulatory and/or statutory requirements.
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    Unlike the current capital requirements applicable to Registered 
Broker-Dealers, the proposed enhanced capital requirements for U.S. 
broker-dealers would result in those Members whose NSCC activity poses 
greater risk to NSCC being required to have and maintain greater levels 
of Excess Net Capital in line with the increased risk.
    As is the case with the current capital requirements applicable to 
Registered Broker-Dealers, the enhanced capital requirements for U.S. 
broker-dealers would depend on whether a Member self-clears or clears 
for others. A broker-dealer that clears transactions for others has the 
potential to present different and greater risks to NSCC than a broker-
dealer that clears transactions only for itself, and it is therefore 
appropriate for such broker-dealer to be subject to heightened capital 
requirements versus a broker-dealer that clears transactions only for 
itself.
    As described in more detail below, the proposed minimum Excess Net 
Capital increases will help ensure NSCC's ongoing compliance with 
regulatory requirements and expectations related to credit risk, such 
as those addressed in CCAS Rules 17Ad-22(e)(4)(i) and (e)(18).\19\
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    \19\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(18).
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    Under the proposal, a Member that is a U.S. broker-dealer must have 
and maintain at all times minimum Excess Net Capital as follows:

----------------------------------------------------------------------------------------------------------------
                                                    Value-at-risk tier
                Clearing status                       (``VaR tier'')            Minimum excess net capital
----------------------------------------------------------------------------------------------------------------
Self-Clearing..................................                <$100,000  $1 million Excess Net Capital
                                                       $100,000-$500,000  2.5 million Excess Net Capital
                                                               >$500,000  5 million Excess Net Capital
Clears for Others..............................                <$100,000  2.5 million Excess Net Capital
                                                       $100,000-$500,000  5 million Excess Net Capital
                                                               >$500,000  10 million Excess Net Capital
----------------------------------------------------------------------------------------------------------------

    The VaR Tier in the table above is based on the daily volatility 
component of a Member's Net Unsettled Positions calculated as of the 
start of each Business Day pursuant to Procedure XV of the Rules \20\ 
as part of the Member's daily Required Fund Deposit. As part of the 
tiered approach, a Member's daily volatility component may exceed its 
then-current VaR Tier four times over a rolling 12-month period. Upon 
the fifth instance of the Member's daily volatility component exceeding 
its then-current VaR Tier, the Member would be moved to the next-
greatest VaR Tier, unless the Member's daily volatility component also 
exceeded such next-greatest VaR Tier five times during the preceding 
12-month period, in which case the Member would be moved to the 
greatest VaR Tier.
---------------------------------------------------------------------------

    \20\ Procedure XV (Clearing Fund Formula and Other Matters), 
supra note 3.
---------------------------------------------------------------------------

    Upon moving to a greater VaR Tier, a Member would then have 60 
calendar days from the date of the move to meet the higher required 
minimum Excess Net Capital for such VaR Tier. If a Member fails to meet 
its higher required minimum Excess Net Capital within 60 calendar days 
and maintain it for so long as such higher required minimum Excess Net 
Capital applies, NSCC may take any and all action against the Member 
pursuant to the Rules.
    Upon moving to a greater VaR Tier, a Member would remain in that 
greater VaR Tier for no less than one continuous year from the date of 
the move before being eligible to move to a lesser VaR Tier. This does 
not in any way preclude a Member from moving to an even greater VaR 
Tier (if any) in accordance with the requirements of this proposal.
    NSCC believes that allowing a Member's daily volatility component 
to exceed its then-current VaR Tier four times over a rolling 12-month 
period before the Excess Net Capital requirement would increase 
provides some flexibility for Members in the

[[Page 74190]]

event of occasional unexpected market volatility while also protecting 
NSCC from the risks of such increased daily volatility. NSCC has 
determined that giving a Member 60 calendar days from the date of its 
move to a higher VaR Tier to meet its higher required minimum Excess 
Net Capital appropriately balances the financial and other costs 
associated with requiring the Member to satisfy the higher required 
minimum Excess Net Capital with the increased risks posed by the 
Member's increased daily volatility. The 60-calendar day period also 
recognizes the practical limitations for a Member to be able to 
immediately increase its capital level, given that raising additional 
capital may require time for the Member to identify additional sources 
of capital such as outside investors, negotiate the terms of that 
capital, and execute any required legal documentation.
    A Member would move to a lesser VaR Tier (if any) when (i) the 
Member has remained in its then-current VaR Tier for no less than one 
continuous year, (ii) the Member's daily volatility component did not 
exceed such lesser VaR Tier on five instances or more over the 
preceding 12-month period and (iii) if at any time the Member's daily 
volatility component did exceed such lesser VaR Tier on five instances 
or more over a rolling 12-month period, the Member has remained in its 
then-current VaR Tier for no less than one continuous year from the 
date of each such instance.
    For example, if a Member's daily volatility component exceeds the 
lesser VaR Tier for the fifth time over a rolling 12-month period on 
February 1, 2021, then the Member would remain in its then-current VaR 
Tier until at least January 31, 2022. If the same Member's daily 
volatility component then exceeds the lesser VaR Tier for the sixth 
time over a rolling 12-month period on February 15, 2021, then the 
Member would remain in its then-current VaR Tier until at least 
February 14, 2022. This does not in any way preclude a Member from 
moving to an even greater VaR Tier (if any) in accordance with the 
requirements of this proposal.
    Newly admitted Members would be placed into the applicable middle 
VaR Tier in the table above unless NSCC determines, based on 
information provided by or concerning the Member, that the Member's 
anticipated VaR Tier for its anticipated trading activity would be the 
greatest VaR Tier, in which case the Member would be placed into the 
greatest VaR Tier. Any such determination would be promptly 
communicated to, and discussed with, the Member. A newly admitted 
Member would remain in its initial VaR Tier until it moves to a 
different VaR Tier in accordance with the requirements of this 
proposal.
    Based on its historical experience with the daily volatility 
components of newly admitted Members, including such Members' own 
projected trading activity,\21\ NSCC believes that it would be 
appropriate to place newly admitted Members into the applicable middle 
VaR Tier in the table above for the first 12 months of membership 
unless NSCC has determined that the Member's anticipated VaR Tier based 
on its anticipated trading activity would be the greatest VaR Tier.
---------------------------------------------------------------------------

    \21\ For example, if the proposed VaR Tiers had been in effect 
for the past two years (but newly admitted Members were not 
automatically placed in at least the middle VaR Tier), only one U.S. 
broker-dealer applicant would have belonged in the lowest VaR Tier 
at admittance, but that firm then had trading activity that placed 
it in the middle VaR Tier in the first month and the highest VaR 
Tier in the second month of membership. See Internal Tiering 
Analysis, included as a Confidential Exhibit 3 to the filing.
---------------------------------------------------------------------------

    NSCC proposes to move the existing capital requirements for Members 
that are Municipal Securities Brokers' Brokers or Municipal Securities 
Brokers' Broker sponsored account applicants to the end of Section 
1.B.1 of Addendum B with some clarifying changes to improve the 
accessibility and transparency of these capital requirements, without 
substantive effect.
U.S. Banks and Trust Companies
    NSCC proposes to (1) change the measure of capital requirements for 
U.S. banks and trust companies from equity capital to common equity 
tier 1 capital (``CET1 Capital''),\22\ (2) raise the minimum capital 
requirements for U.S. banks and trust companies, and (3) require U.S. 
banks and trust companies to be well capitalized (``Well Capitalized'') 
as defined in the capital adequacy rules and regulations of the Federal 
Deposit Insurance Corporation (``FDIC'').\23\
---------------------------------------------------------------------------

    \22\ Under the proposal, CET1 Capital would be defined as an 
entity's common equity tier 1 capital, calculated in accordance with 
such entity's regulatory and/or statutory requirements.
    \23\ See 12 CFR 324.403(b)(1).
---------------------------------------------------------------------------

    NSCC proposes to change the measure of capital requirements for 
U.S. banks and trust companies from equity capital to CET1 Capital and 
raise the minimum capital requirements for U.S. banks and trust 
companies in order to align NSCC's capital requirements with banking 
regulators' changes to regulatory capital requirements over the past 
several years, which have standardized and harmonized the calculation 
and measurement of bank capital and leverage throughout the world.\24\ 
Consistent with these changes by banking regulators, NSCC believes that 
the appropriate capital measure for Members that are U.S. banks and 
trust companies should be CET1 Capital and that NSCC's capital 
requirements for Members should be enhanced in light of these increased 
regulatory capital requirements.
---------------------------------------------------------------------------

    \24\ Compare, e.g., 12 CFR 324.20(b) (FDIC's definition of CET1 
Capital), and Regulation (EU) No 575/2013 of the European Parliament 
and of the Council of 26 June 2013 on prudential requirements for 
credit institutions and investment firms and amending Regulation 
(EU) No 648/2012, Article 26, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32013R0575 (European 
Union's definition of CET1 Capital), with Basel Committee on Banking 
Supervision, Basel III Standards, CAP10.6, supra note 5 (Basel III 
Standards' definition of CET1 Capital).
---------------------------------------------------------------------------

    In addition, requiring U.S. banks and trust companies to be Well 
Capitalized ensures that Members are well capitalized while also 
allowing adjusted capital to be relative to either the risk-weighted 
assets or average total assets of the bank or trust company. NSCC 
proposes to have the definition of Well Capitalized expressly tied to 
the FDIC's definition of ``well capitalized'' to ensure that the 
proposed requirement that U.S. banks and trust companies be Well 
Capitalized will keep pace with future changes to banking regulators' 
regulatory capital requirements.
    Under the proposal, a Member that is a U.S. bank or a U.S. trust 
company that is a bank must (1) have and maintain at all times at least 
$500 million in CET1 Capital and be Well Capitalized at all times or 
(2) have furnished to NSCC a guarantee of its parent bank holding 
company respecting the payment of any and all obligations of the 
Member, and such parent bank holding company must have and maintain at 
all times CET1 Capital of at least $500 million and be Well Capitalized 
at all times.
    NSCC does not propose to change the existing capital requirements 
applicable to a Member that is a U.S. trust company that is not a bank, 
although NSCC is proposing to make some clarifying and conforming 
language changes to improve the accessibility and transparency of these 
capital requirements, without substantive effect.
    NSCC treats U.S. trust companies that are banks and non-banks 
differently because they present different risks based on the attendant 
risks of their business activities, with trust companies engaging in 
banking activities (e.g., receiving deposits and making loans) being 
subject to greater risks than trust companies that limit their 
activities to trust activities (e.g., acting as a trustee,

[[Page 74191]]

other fiduciary or transfer agent/registrar).
Non-U.S. Broker-Dealers and Banks
    NSCC proposes to impose a minimum capital requirement of $25 
million in total equity capital for Members that are non-U.S. broker-
dealers.
    NSCC proposes to require a Member that is a non-U.S. bank 
(including a U.S. branch or agency) to (1) (A) have and maintain at all 
times at least $500 million in CET1 Capital and comply at all times 
with the minimum capital requirements (including, but not limited to, 
any capital conservation buffer, countercyclical buffer, and any D-SIB 
or G-SIB buffer, if applicable) and capital ratios required by its home 
country regulator, or, if greater, with such minimum capital 
requirements or capital ratios standards promulgated by the Basel 
Committee on Banking Supervision,\25\ (B) provide an attestation for 
itself, its parent bank and its parent bank holding company (as 
applicable) detailing the minimum capital requirements (including, but 
not limited to, any capital conservation buffer, countercyclical 
buffer, and any D-SIB or G-SIB buffer, if applicable) and capital 
ratios required by their home country regulator, (C) provide, no less 
than annually and upon request by NSCC, an attestation for the Member, 
its parent bank and its parent bank holding company (as applicable) 
detailing the minimum capital requirements (including, but not limited 
to, any capital conservation buffer, countercyclical buffer, and any D-
SIB or G-SIB buffer, if applicable) and capital ratios required by 
their home country regulator and (D) notify NSCC: (i) Within two 
Business Days of any of their capital requirements (including, but not 
limited to, any capital conservation buffer, countercyclical buffer, 
and any D-SIB or G-SIB buffer, if applicable) or capital ratios falling 
below any minimum required by their home country regulator; and (ii) 
within 15 calendar days of any such minimum capital requirement or 
capital ratio changing; or (2) (A) have furnished to NSCC a guarantee 
of its parent bank holding company respecting the payment of any and 
all obligations of the Member, (B) have such parent bank holding 
company maintain at all times CET1 Capital of at least $500 million and 
comply at all times with the minimum capital requirements (including, 
but not limited to, any capital conservation buffer, countercyclical 
buffer, and any D-SIB or G-SIB buffer, if applicable) and capital 
ratios required by its home country regulator, or, if greater, with 
such minimum capital requirements or capital ratios standards 
promulgated by the Basel Committee on Banking Supervision,\26\ (C) 
provide an attestation for itself, its parent bank and its parent bank 
holding company (as applicable) detailing the minimum capital 
requirements (including, but not limited to, any capital conservation 
buffer, countercyclical buffer, and any D-SIB or G-SIB buffer, if 
applicable) and capital ratios required by their home country 
regulator, (D) provide, no less than annually and upon request by NSCC, 
an attestation for the Member, its parent bank and its parent bank 
holding company (as applicable) detailing the minimum capital 
requirements (including, but not limited to, any capital conservation 
buffer, countercyclical buffer, and any D-SIB or G-SIB buffer, if 
applicable) and capital ratios required by their home country regulator 
and (E) notify NSCC: (i) Within two Business Days of any of their 
capital requirements (including, but not limited to, any capital 
conservation buffer, countercyclical buffer, and any D-SIB or G-SIB 
buffer, if applicable) or capital ratios falling below any minimum 
required by their home country regulator, and (ii) within 15 calendar 
days of any such minimum capital requirement or capital ratio changing.
---------------------------------------------------------------------------

    \25\ See Basel Committee on Banking Supervision, Basel III 
Standards, supra note 5.
    \26\ See id.
---------------------------------------------------------------------------

    As described above, pursuant to Addendum O (Admission of Non-U.S. 
Entities as Direct NSCC Members),\27\ the current minimum capital 
requirements for a Member, Mutual Fund/Insurance Services Member, Fund 
Member or Insurance Carrier/Retirement Services Member that does not 
prepare its financial statements in accordance with U.S. GAAP is 
subject to a multiplier that requires such member to have capital 
between 1\1/2\ to 7 times the otherwise-applicable capital requirement.
---------------------------------------------------------------------------

    \27\ Addendum O applies to all entities that are organized in a 
country other than the U.S. and that are not otherwise subject to 
U.S. federal or state regulation (``non-U.S. entities''), other than 
insurance companies.
---------------------------------------------------------------------------

    The multiplier was designed to account for the less transparent 
nature of accounting standards other than U.S. GAAP. However, 
accounting standards have converged over the years (namely 
International Financial Reporting Standards (``IFRS'') and U.S. 
GAAP).\28\ As such, NSCC believes the multiplier is no longer necessary 
and its retirement would be a welcomed simplification for both NSCC and 
its members.
---------------------------------------------------------------------------

    \28\ The convergence between IFRS and U.S. GAAP began with the 
2002 Norwalk Agreement. (Available at https://www.ifrs.org/content/dam/ifrs/around-the-world/mous/norwalk-agreement-2002.pdf.) Under 
that agreement, the Financial Accounting Standards Board (``FASB'') 
and the International Accounting Standards Board (``IASB'') signed a 
memorandum of understanding on the convergence of accounting 
standards. Between 2010 and 2013, FASB and IASB published several 
quarterly progress reports on their work to improve and achieve 
convergence of U.S. GAAP and IFRS. In 2013, the International 
Financial Reporting Standards Foundation established the Accounting 
Standards Advisory Forum (``ASAF'') to improve cooperation among 
worldwide standard setters and advise the IASB as it developed IFRS. 
(See https://www.ifrs.org/groups/accounting-standards-advisory-forum/.) FASB was selected as one of the ASAF's twelve members. 
FASB's membership on the ASAF helps represent U.S. interests in the 
IASB's standard-setting process and continues the process of 
improving and converging U.S. GAAP and IFRS. In February 2013, the 
Journal of Accountancy published its view of the success of the 
convergence project citing converged or partially converged 
standards, including business combinations, discontinued operations, 
fair value measurement, and share-base payments. (Available at 
https://www.journalofaccountancy.com/issues/2013/feb/20126984.html.) 
Subsequent to the publication, IASB and FASB converge on revenue 
recognition. While IASB and FASB have not achieved full convergence, 
NSCC believes the accounting rules are sufficiently aligned such 
that the multiplier is no longer required.
---------------------------------------------------------------------------

    Accordingly, NSCC proposes to delete the language in Addendum O 
providing that the minimum capital requirements for a Member, Mutual 
Fund/Insurance Services Member, Fund Member or Insurance Carrier/
Retirement Services Member that does not prepare its financial 
statements in accordance with U.S. GAAP is subject to a multiplier that 
requires such members to have capital between 1\1/2\ to 7 times the 
otherwise-applicable capital requirement. Instead, a Member, Mutual 
Fund/Insurance Services Member, Fund Member or Insurance Carrier/
Retirement Services Member would be required to meet the minimum 
capital requirements provided in Addendum B for the applicable 
membership.
    As described above, NSCC also proposes that non-U.S. banks be 
compliant with the minimum capital requirements and capital ratios in 
their home jurisdiction. Given the difficulty in knowing and monitoring 
compliance with various regulatory minimums for various jurisdictions, 
these Members would be required to provide NSCC with periodic 
attestations relating to the minimum capital requirements and capital 
ratios for their home jurisdiction.
    NSCC also proposes to make some clarifying language changes to 
Addendum O to replace references to undefined capitalized terms and 
improve the accessibility of Addendum O, without substantive effect.

[[Page 74192]]

Other Types of Members
    NSCC also proposes that (1) a Member that is (A) a national 
securities exchange registered under the Exchange Act and/or (B) a non-
U.S. securities exchange or multilateral trading facility, must have 
and maintain at all times at least $100 million in equity capital, (2) 
a Member that is a broker-dealer that is acting as an Index Receipt 
Agent must have and maintain at all times minimum Excess Net Capital of 
$100 million, and (3) for a type of applicant or Member that is not 
otherwise addressed above, (A) such applicant or Member must maintain 
compliance with its home country regulator's minimum financial 
requirements at all times and (B) NSCC may, based on information 
provided by or concerning an applicant or Member, also assign minimum 
financial requirements to such applicant or Member based on how closely 
it resembles another membership type and its risk profile. Any such 
assigned minimum financial requirements would be promptly communicated 
to, and discussed with, the applicant or Member.
    In the case of Index Receipt Agents, the higher capital requirement 
for this subset of Members is being proposed in order to reflect the 
systemic risk presented by the potential failure of an Index Receipt 
Agent. The failure of an Index Receipt Agent could present systemic 
risk because such failure could potentially result in disruptions at 
the exchange-traded funds (``ETFs'') for which the Index Receipt Agent 
acts. As a result of this systemic risk, Members acting as Index 
Receipt Agents require a moderately sized capital base to support this 
business function. Similarly, NSCC proposes to create a standard 
capital requirement for Members that are securities exchanges due to 
the systemic importance of these Members and the need to hold these 
Members to a consistent, high standard to ensure that they have 
sufficient capital to fulfill their systemically important role.
Limited Members
    NSCC proposes that a Mutual Fund/Insurance Services Member, Fund 
Member or Settling Bank Only Member that is a U.S. bank or trust 
company that, in accordance with such entity's regulatory and/or 
statutory requirements, calculates a Tier 1 RBC Ratio must have at all 
times a Tier 1 RBC Ratio equal to or greater than the Tier 1 RBC Ratio 
that would be required for such entity to be Well Capitalized. As 
discussed above, NSCC proposes to have the definition of Well 
Capitalized expressly tied to the FDIC's definition of ``well 
capitalized'' to ensure that the proposed requirement that U.S. banks 
and trust companies be Well Capitalized will keep pace with future 
changes to banking regulators' regulatory capital requirements. 
Similarly, NSCC proposes to add a new defined term of ``Tier 1 RBC 
Ratio'' to Rule 1 in order to replace a reference to an undefined term 
in the Rules with its intended meaning. Under the proposal, Tier 1 RBC 
Ratio would be defined as the ratio of an entity's tier 1 capital to 
its total-risk weighted assets, calculated in accordance with such 
entity's regulatory and/or statutory requirements.
    NSCC proposes to clarify existing language providing that a Mutual 
Fund/Insurance Services Member or Fund Member that is a U.S. trust 
company that does not calculate a Tier 1 RBC Ratio must have at least 
$2 million in equity capital, without substantive effect. Relatedly, 
NSCC proposes to revise the definition of ``RBC Ratio,'' which is used 
in the capital requirements for Mutual Fund/Insurance Services Members, 
Fund Members and Insurance Carrier/Retirement Services Members, in the 
list of defined terms in Rule 1 for clarity in order to replace a 
reference to an undefined capitalized term with its intended meaning 
and to remove unnecessary limitations on the types of entities and 
legal requirements to which the term RBC Ratio applies.
    For a Limited Member that is a non-U.S. entity not described in the 
section of Addendum B that applies to such type of Limited Member, such 
entity would be required to satisfy such minimum standards of financial 
responsibility as determined in accordance with such section of 
Addendum B.
Other Proposed Changes to Addendum B
Introduction and General Changes
    NSCC proposes to make it clear throughout Addendum B that following 
an applicant's admission to membership it is required to continue 
meeting the qualifications, financial responsibility, operational 
capability and business history requirements as applicable to its 
membership type.\29\ Specifically, NSCC proposes to include references 
throughout Addendum B clarifying that such requirements apply to both 
applicants and members. NSCC also proposes to revise a sentence in the 
introduction and Sections 1.B, 2.B, 3.B and 4.B of Addendum B to 
correct language limited to applicant financial responsibility 
requirements.
---------------------------------------------------------------------------

    \29\ See Rule 2B (Ongoing Membership Requirements and 
Monitoring), Section 1 (Requirements), supra note 3.
---------------------------------------------------------------------------

    NSCC also proposes to add the word ``requirements'' in one place in 
the introduction to improve readability.
    NSCC proposes to clarify, without substantive effect, the existing 
language in Sections 2.B and 3.B of Addendum B that if a member is not 
of a type otherwise addressed in such section, it will be required to 
satisfy such minimum standards of financial responsibility as 
determined by NSCC. Any such assigned minimum financial requirements 
would be promptly communicated to, and discussed with, the member.
    NSCC also proposes to add a sentence to the end of Sections 5.B and 
6.B of Addendum B that any assigned minimum standards of financial 
responsibility for Municipal Comparison Only Members and Data Services 
Only Members, respectively, would be promptly communicated to, and 
discussed with, such members.
    At the end of Sections 1.B, 2.B and 3.B of Addendum B, NSCC 
proposes to make explicit that, notwithstanding anything to the 
contrary in such section, an applicant or member must maintain 
compliance with its home country regulator's minimum financial 
requirements at all times.
Section 1
    NSCC is proposing to revise the headings in Section 1.B referring 
to a Member's type of entity to read ``U.S. Broker-Dealers,'' ``U.S. 
Banks and Trust Companies,'' ``Non-U.S. Broker-Dealers and Banks,'' 
``Securities Exchanges,'' ``Index Receipt Agents'' and ``Others,'' in 
conformity with the above-described changes to Member financial 
responsibility requirements.
Section 2
    NSCC proposes to clarify and simplify the language describing the 
capital requirement for a Mutual Fund/Insurance Services Member that is 
a Registered Broker-Dealer or an Insurance Company, without substantive 
effect.
    NSCC proposes to revise the heading ``Banks and trust companies'' 
in Section 2.B to read ``U.S. Banks and Trust Companies'' in conformity 
with the same change made in Section 1.B.
Section 3
    NSCC proposes to clarify and simplify the language describing the 
capital requirement for a Fund Member that is a Registered Broker-
Dealer, investment company, investment adviser or

[[Page 74193]]

Insurance Company, without substantive effect.
    NSCC proposes to revise the heading ``Banks or trust companies'' in 
Section 3.B to read ``U.S. Banks and Trust Companies'' in conformity 
with the same changes made in Sections 1.B and 2.B.
Section 4
    NSCC proposes to clarify and simplify the language describing the 
capital requirement for an Insurance Carrier/Retirement Services 
Member, without substantive effect.
Sections 5 through 12
    As noted above, NSCC proposes to make it clear in Sections 5 
through 12 of Addendum B that following an applicant's admission to 
membership it is required to continue meeting the qualifications, 
financial responsibility, operational capability and business history 
requirements as applicable to its membership type.
B. Changes to NSCC's Watch List and Enhanced Surveillance List
    NSCC proposes to redefine the Watch List and eliminate the separate 
enhanced surveillance list and instead implement a new Watch List that 
consists of a relatively smaller group of members that pose heightened 
risk to NSCC and its members.
    NSCC believes that the current system of having both a Watch List 
and an enhanced surveillance list (which include some of the same 
members) has confused various NSCC stakeholders, while the proposed 
approach, as NSCC understands from its experience, would be more 
consistent with industry practices and understanding of a ``Watch 
List.''
    The new Watch List would include Members with a CRRM rating of 6 or 
7, as well as members that are deemed by NSCC to pose a heightened risk 
to it and its members. The separate enhanced surveillance list would be 
merged into the new Watch List and references to the separate enhanced 
surveillance list would be deleted from the Rules.
    In sum, the new Watch List would consist of members on the existing 
enhanced surveillance list, Members with a CRRM rating of 6 or 7, and 
any other members that are deemed by NSCC to pose a heightened risk to 
it and its members.
    The proposed change will mean that Members with a CRRM rating of 5 
would no longer automatically be included on the Watch List. Members 
with a CRRM rating of 5 represent the largest single CRRM rating 
category, but NSCC does not believe all such Members present heightened 
credit concerns.\30\ Nevertheless, NSCC would continue to have the 
authority to place a Member on the new Watch List if it is deemed to 
pose a heightened risk to NSCC and its Members and/or to downgrade the 
CRRM rating of a Member.
---------------------------------------------------------------------------

    \30\ The majority of Members with a CRRM rating of 5 are either 
rated ``investment grade'' by external rating agencies or, in the 
absence of external ratings, NSCC believes are equivalent to 
investment grade, as many of these Members are primary dealers and 
large foreign banks. A firm with a rating of ``investment grade'' is 
understood to be better able to make its payment obligations 
compared to a firm with a lesser rating, such as a rating of 
``speculative.'' As such, among the total population, firms with 
investment grade ratings are generally considered good credit risk 
along a credit risk scale.
---------------------------------------------------------------------------

    NSCC also proposes to clarify in Section 4(f) of Rule 2B that 
members on the Watch List are reported to NSCC's management committees 
and regularly reviewed by NSCC's senior management.
C. Certain Other Clarification Changes
    In connection with the above-described changes to the Rules to 
enhance NSCC's capital requirements for members and redefine the Watch 
List and eliminate the enhanced surveillance list, NSCC proposes to 
make certain other clarification changes in order to improve the 
accessibility and transparency of the Rules, as follows:
    NSCC proposes to revise Section 4(g) of Rule 2B to clarify the 
relationship between NSCC and a parent bank holding company of a Member 
that has guaranteed the obligations of the Member in accordance with 
Addendum B, and to delete the unnecessary word ``affiliated'' when 
referring to a material banking subsidiary of such parent bank holding 
company.
    NSCC proposes to clarify Rule 7, Section 4 \31\ to state that a 
Member desiring to become an Index Receipt Agent shall first submit an 
application to be reviewed by NSCC.
---------------------------------------------------------------------------

    \31\ Rule 7 (Comparison and Trade Recording Operation), Section 
4 (Index Receipt Agent), supra note 3.
---------------------------------------------------------------------------

    NSCC also proposes to revise Section 1 of Rule 46 \32\ to clarify 
the relationship between NSCC and a parent bank holding company of a 
Member that has guaranteed the obligations of the Member in accordance 
with Addendum B.
---------------------------------------------------------------------------

    \32\ Rule 46 (Restrictions on Access to Services), Section 1, 
supra note 3.
---------------------------------------------------------------------------

Member Outreach
    Beginning in June 2019, NSCC conducted outreach to various Members 
in order to provide them with advance notice of the proposed 
enhancements to NSCC's capital requirements, the proposed redefinition 
of the Watch List, and the proposed elimination of the enhanced 
surveillance list. NSCC has been in communication with all Members 
whose current capital levels are either below the proposed minimum 
capital requirements or only slightly above the proposed requirements. 
Any such Members have been informed of the new requirement that would 
be in effect 12 months after approval of the proposed changes. 
Following approval, NSCC again would contact any Members that are 
either below or only slightly above the new minimum requirement to 
remind them of their new capital requirement and the 12-month grace 
period in which to come into compliance with the new requirement.
    NSCC has received some written feedback from Members on the 
proposed enhancements to NSCC's capital requirements for certain 
Members, which are discussed in Item 4 below. The Commission will be 
notified of any additional written comments received.
    NSCC has not conducted outreach to members providing them with 
advance notice of the proposed clarification changes to the Rules.
Implementation Timeframe
    Pending Commission approval, NSCC would implement the proposed 
changes to enhance its capital requirements for members one year after 
the Commission's approval of this proposed rule change. During that 
one-year period, NSCC would periodically provide Members with estimates 
of their capital requirements, based on the approved changes, with more 
outreach expected for Members impacted by the changes. NSCC would 
inform a Member that is a U.S. broker-dealer (``BD Member'') if it 
exceeded its then-current VaR Tier, which may lead to the BD Member 
moving into a higher VaR Tier and, thus, being subject to a higher 
capital requirement. Same as the proposed, ongoing practice post-
implementation, NSCC would provide the Member with a grace period of 60 
days from the date of implementation to comply with the higher 
requirement.
    The deferred implementation for all members and the estimated 
capital requirements for Members are designed to give members the 
opportunity to assess the impact of their enhanced capital requirements 
on their business profile and make any changes that they deem necessary 
to lower their capital requirement. All members would be advised of the 
implementation date of these proposed changes through issuance of an 
NSCC Important Notice,

[[Page 74194]]

posted to its website. NSCC also would inform firms applying for 
participation of the new capital requirements. Members and applicants 
should note that the methodology/processes used to set their initial 
capital requirements would be the same at implementation of the 
proposed changes as it would be on an ongoing basis.
    NSCC expects to implement the proposed changes to redefine the 
Watch List and eliminate the enhanced surveillance list, as well as the 
clarification changes to the Rules, within 90 days of Commission 
approval. All members would be advised of such implementation through 
issuance of an NSCC Important Notice, posted to its website.
2. Statutory Basis
    NSCC believes that the proposed rule change is consistent with the 
requirements of the Exchange Act, and the rules and regulations 
thereunder applicable to a registered clearing agency. Specifically, 
NSCC believes that the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Exchange Act \33\ and Rules 17Ad-22(b)(7), 
(e)(4)(i), (e)(18) and (e)(19),\34\ each as promulgated under the 
Exchange Act, for the reasons described below.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1(b)(3)(F).
    \34\ 17 CFR 240.17Ad-22(b)(7), (e)(4)(i), (e)(18) and (e)(19).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Exchange Act requires, in part, that 
the Rules be designed to promote the prompt and accurate clearance and 
settlement of securities transactions.\35\ As described above, the 
proposed rule changes would (1) enhance NSCC's capital requirements for 
members, (2) redefine the Watch List and eliminate the enhanced 
surveillance list, and (3) make clarification changes to the Rules. 
NSCC believes that enhancing its capital requirements for members, 
including continuing to recognize and account for varying Members and 
memberships, would help ensure that members maintain sufficient capital 
to absorb losses arising out of their clearance and settlement 
activities at NSCC and otherwise, and would help NSCC more effectively 
manage and mitigate the credit risks posed by its members, which would 
in turn help NSCC be better able to withstand such credit risks and 
continue to meet its clearance and settlement obligations to its 
members. Similarly, NSCC believes that redefining the Watch List and 
eliminating the enhanced surveillance list, as described above, would 
help NSCC better allocate its resources for monitoring the credit risks 
posed by its members, which would in turn help NSCC more effectively 
manage and mitigate such credit risks so that NSCC is better able to 
withstand such credit risks and continue to meet its clearance and 
settlement obligations to its members. NSCC believes that making 
clarification changes to the Rules would help ensure that the Rules 
remain clear and accurate, which would in turn help facilitate members' 
understanding of the Rules and provide members with increased 
predictability and certainty regarding their rights and obligations 
with respect to NSCC's clearance and settlement activities. Therefore, 
NSCC believes that these proposed rule changes would promote the prompt 
and accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Exchange Act.
---------------------------------------------------------------------------

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

    Rule 17Ad-22(b)(7) under the Exchange Act requires, in part, that 
NSCC establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide a person that maintains net 
capital equal to or greater than $50 million with the ability to obtain 
membership at NSCC, provided that NSCC may provide for a higher net 
capital requirement as a condition for membership if it demonstrates to 
the Commission that such a requirement is necessary to mitigate risks 
that could not otherwise be effectively managed by other measures.\36\ 
As described above, NSCC proposes to enhance its capital requirements 
for members. NSCC believes that these proposed rule changes, while 
referencing capital measures other than net capital, would help ensure 
that members maintain sufficient capital to absorb losses arising out 
of their clearance and settlement activities at NSCC and otherwise, and 
would help NSCC more effectively manage and mitigate the credit risks 
posed by its members while providing fair and open access to membership 
at NSCC. NSCC believes that the proposed changes would utilize capital 
measures that are appropriately matched to the regulatory and other 
capital requirements applicable to the types of entities that apply for 
and have membership at NSCC, which would in turn help facilitate 
members' understanding of and compliance with NSCC's enhanced capital 
requirements. NSCC also believes that these other capital measures are 
more appropriate measures of the capital available to members to absorb 
losses arising out of their clearance and settlement activities at NSCC 
than simply net capital because a member's net capital alone may not be 
available to absorb losses arising out of such activities. Thus, 
relying on measures beyond net capital would help members more 
effectively understand and manage the resources available to mitigate 
the credit risks they pose to NSCC. In the case of those proposed rule 
changes that may require members such as U.S. banks and trust 
companies, non-U.S. banks, national securities exchanges, non-U.S. 
securities exchanges or multilateral trading facilities, or Index 
Receipt Agents to maintain capital greater than $50 million, NSCC 
believes that enhanced capital requirements for such members are 
necessary and appropriate in light of the regulatory and other capital 
requirements that such members face and the credit risks they pose to 
NSCC, which would help NSCC more effectively manage and mitigate such 
credit risks. Therefore, NSCC believes that the enhanced capital 
requirements for members are necessary to mitigate risks that could not 
otherwise be effectively managed by other measures, consistent with 
Rule 17Ad-22(b)(7) under the Exchange Act.
---------------------------------------------------------------------------

    \36\ 17 CFR 240.17Ad-22(b)(7).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Exchange Act 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.\37\ As described above, NSCC proposes to enhance its 
capital requirements for members, redefine the Watch List, and 
eliminate the enhanced surveillance list. NSCC believes that enhancing 
its capital requirements for members would help ensure that members 
maintain sufficient capital to absorb losses arising out of their 
clearance and settlement activities at NSCC and otherwise, which would 
in turn help NSCC more effectively manage and mitigate its credit 
exposures to its members and thereby help enhance the ability of NSCC's 
financial resources to cover fully NSCC's credit exposures to members 
with a high degree of confidence. NSCC believes that redefining the 
Watch List and eliminating the enhanced surveillance list would help 
NSCC better allocate its resources for monitoring its credit exposures 
to

[[Page 74195]]

members. By helping to better allocate resources, the proposal would in 
turn help NSCC more effectively manage and mitigate its credit 
exposures to its members, thereby helping to enhance the ability of 
NSCC's financial resources to cover fully NSCC's credit exposures to 
members with a high degree of confidence. Therefore, NSCC believes that 
its proposal to enhance its capital requirements for members, redefine 
the Watch List, and eliminate the enhanced surveillance list is 
consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.
---------------------------------------------------------------------------

    \37\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) under the Exchange Act requires that NSCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation, which permit fair and 
open access by direct and, where relevant, indirect participants and 
other financial market utilities, require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency, and 
monitor compliance with such participation requirements on an ongoing 
basis.\38\ As described above, NSCC proposes to enhance its capital 
requirements for members, redefine the Watch List, and eliminate the 
enhanced surveillance list. NSCC's proposed capital requirements would 
utilize objective measurements of member capital that would be fully 
disclosed in the Rules. The proposed capital requirements also would be 
risk-based and allow for fair and open access in that they would be 
based on the credit risks imposed by the member, such as its membership 
type, type of entity (including whether it is a non-U.S. entity), 
whether it self-clears or clears for others, and its VaR Tier. 
Accordingly, NSCC's proposed capital requirements would establish 
objective, risk-based and publicly disclosed criteria for membership, 
which would permit fair and open access by members. The proposed 
capital requirements also would ensure that members maintain sufficient 
capital to absorb losses arising out of their clearance and settlement 
activities at NSCC and otherwise, which would help ensure that they 
have sufficient financial resources to meet the obligations arising 
from their membership at NSCC. NSCC's proposed redefinition of the 
Watch List and the elimination of the enhanced surveillance list would 
help NSCC better allocate its resources for monitoring the credit risks 
posed by its members, including their ongoing compliance with NSCC's 
proposed enhancements to its capital requirements. Therefore, NSCC 
believes that its proposal to enhance its capital requirements for 
members, redefine the Watch List, and eliminate the enhanced 
surveillance list is consistent with Rule 17Ad-22(e)(18) under the 
Exchange Act.
---------------------------------------------------------------------------

    \38\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(19) under the Exchange Act requires that NSCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify, monitor, and manage the 
material risks to NSCC arising from arrangements in which firms that 
are indirect participants in NSCC rely on the services provided by 
direct participants to access NSCC's payment, clearing, or settlement 
facilities.\39\ As described above, NSCC proposes to enhance its 
capital requirements for members, including U.S. broker-dealer Members 
that clear transactions for others. More specifically, the proposal 
would subject U.S. broker-dealer Members that clear transactions for 
others to heightened capital requirements versus U.S. broker-dealer 
Members that clear transactions only for themselves. NSCC believes that 
a broker-dealer Member that clears transactions for others (i.e., a 
direct participant) can present additional risk because it could clear 
for a large number of correspondent clients (i.e., indirect 
participants), which would expand the scope and volume of risk 
presented to NSCC and the direct participant itself when the indirect 
participant's trades are submitted to NSCC for settlement via the 
direct participant. The indirect nature of this risk exposure also 
increases risk to NSCC as there is generally less transparency into the 
indirect activity versus if the direct participant generated all of the 
activity itself. By requiring a U.S. broker-dealer Member that clears 
transactions for others to be subject to heightened capital 
requirements versus a U.S. broker-dealer Member that clears 
transactions only for itself, the proposal would help ensure that NSCC 
is able to better manage the material risks to NSCC arising from 
arrangements in which a Member clears transactions for others through 
NSCC. Therefore, NSCC believes that its proposal to enhance its capital 
requirements for members is consistent with Rule 17Ad-22(e)(19) under 
the Exchange Act.
---------------------------------------------------------------------------

    \39\ 17 CFR 240.17Ad-22(e)(19).
---------------------------------------------------------------------------

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

    NSCC believes that the proposed rule change to enhance its capital 
requirements for BD Members could have an impact upon competition 
because some BD Members could be required to maintain capital in excess 
of their current capital levels. That impact could impose a burden on 
competition on some of those BD Members because they may bear higher 
costs to raise capital in order to comply with the enhanced capital 
requirements.
    Consistent with that belief, NSCC received three written comments 
from three BD Members arguing that the proposed enhancements to the 
capital requirements for BD Members (``Proposed BD Requirements'') 
could negatively affect smaller BD Members.\40\
---------------------------------------------------------------------------

    \40\ Letter from Bonnie K. Wachtel, Chief Executive Officer, and 
Wendie L. Wachtel, Chief Operating Officer, Wachtel & Co., Inc. 
(September 16, 2019) (``Wachtel Letter''); Email from Samuel F. Lek, 
Lek Securities Corporation (September 17, 2019) (``Lek Email''); 
Email from William L. Walker, Chief Operating Officer, Wilson-Davis 
& Co., Inc. (October 31, 2019) (``Wilson-Davis Email''). Copies of 
the comments received have been included as Exhibit 2 to the filing, 
pursuant to the requirements of Form 19b-4 and the General 
Instructions for Form 19b-4, available at https://www.sec.gov/about/forms/form19b-4.pdf.
---------------------------------------------------------------------------

    Two of the commenters argue that the Proposed BD Requirements will 
unfairly discriminate against small BD Members in favor of the largest 
BD Members,\41\ with one of the commenters further arguing that mid-
sized BD Member firms also will be discriminated against.\42\ 
Similarly, a third commenter argues that, in addition to affecting 
small BD Members, the Proposed BD Requirements will drastically affect 
other industry participants and small companies that do business with 
and that rely on such BD Members to raise capital.\43\
---------------------------------------------------------------------------

    \41\ Wachtel Letter, supra note 40; Lek Email, supra note 40.
    \42\ Wachtel Letter, supra note 40.
    \43\ Wilson-Davis Email, supra note 40.
---------------------------------------------------------------------------

    Two of the commenters argue that the Proposed BD Requirements will 
create barriers to entry.\44\ Moreover, one of those commenters argues 
that the barriers to entry will cause further industry 
consolidation,\45\ while the other argues that the barriers are 
anticompetitive and, when considered with the argued effect on smaller 
broker-dealers, at odds with the goals of the Exchange Act.\46\
---------------------------------------------------------------------------

    \44\ Wachtel Letter, supra note 40; Lek Email, supra note 40.
    \45\ Wachtel Letter, supra note 40.
    \46\ Lek Email, supra note 40.
---------------------------------------------------------------------------

    Regarding the proposed VaR Tiers for BD Members, one commenter 
suggests that the proposed tiering scale should

[[Page 74196]]

not end at $5 million Excess Net Capital for a self-clearing BD Member 
with a daily volatility component of more than $500,000 for its Net 
Unsettled Positions; rather, the scale should continue 
indefinitely.\47\ Meanwhile, another commenter suggests that the 
proposed $10 million in Excess Net Capital for a BD Member that clears 
for others is not necessary to address the risk presented by such BD 
Member because its required margin will be greater than $500,000 for 
its Net Unsettled Positions.\48\ That same commenter also argues that 
the VaR Tiers are extremely low, which is an effort to target smaller 
BD Members and ignores the greater risk presented by larger BD 
Members.\49\
---------------------------------------------------------------------------

    \47\ Wachtel Letter, supra note 40.
    \48\ Lek Email, supra note 40.
    \49\ Id.
---------------------------------------------------------------------------

    NSCC values each of its BD Members and does not wish to create a 
competitive burden on any of them or any of their clients. The Proposed 
BD Requirements were not designed to discriminate against any BD 
Members (small, medium, or large), create a barrier to NSCC membership, 
or force any BD Member to clear through another financial institution 
or exit the business completely. Rather, as discussed above and below, 
the Proposed BD Requirements were designed and tailored to help address 
the specific risks presented by BD Members within the current industry 
environment.
    Nevertheless, NSCC fully appreciates that the Proposed BD 
Requirements may result in a burden on competition for some BD Members 
that would need to raise or keep more capital on hand in order to 
comply with the new requirements, although NSCC does not believe that 
any such burden on competition would be significant. In any event, to 
the extent the Proposed BD Requirements would be a burden on 
competition, NSCC believes that the burden would be necessary and 
appropriate in furtherance of the purposes of the Exchange Act, as 
permitted by Section 17A(b)(3)(I) thereunder.\50\
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    NSCC believes the Proposed BD Requirements are necessary because, 
in short, the current requirements are outdated. As noted above, the 
current minimum capital requirements for members have not been adjusted 
in over 20 years. Meanwhile, there have been significant changes to the 
industry (e.g., market structure, technology, and regulatory 
environment) within which NSCC and all its members operate, exposing 
NSCC and its members to more and different risks than 20 years ago.
    There also have been significant membership changes over the past 
20 years. Numerous mergers, acquisitions, and new market entrants have 
created a diverse NSCC membership that has expanded the credit-risk 
profiles that NSCC must manage. For example, NSCC has seen an increase 
in less capitalized market participants focusing on niche parts of the 
market with innovative new business models.
    Additionally, as mentioned above, trading activity and market 
volatility, each of which present risk to NSCC, ballooned over the 
years.\51\ While NSCC does collect margin from its members to help 
address these types of risk, it is imperative that NSCC ensure that its 
members have sufficient capital to sustain unexpected and/or sustained 
increases in margin requirements. Although the above factors do not 
directly require NSCC to increase capital requirements for its 
membership (e.g., there is no specific regulation or formula that 
prescribes a set capital requirement for members of a CCP such as 
NSCC), the overarching and collective focus of the regulatory changes 
noted above, in light of the many heightened risks to the financial 
industry, has been to increase the stability of the financial markets 
in order to reduce systemic risk. As a self-regulatory organization, a 
SIFMU, and being exposed to the new and increased risks over the past 
20 years, NSCC has a responsibility to do the same. Enhancing its 
capital requirements helps meet that responsibility and improve NSCC's 
credit risk management.
---------------------------------------------------------------------------

    \51\ See supra note 9.
---------------------------------------------------------------------------

    Moreover, stress testing has also highlighted that BD Members with 
smaller capital bases are exposed to the risk of losses exceeding their 
current Excess Net Capital requirements under a stressed scenario.\52\ 
There also has been heightened focus on legal, operational, and cyber 
risk, given the devastating impact that they could have today. In the 
case of legal risk, members can and do face legal exposures that exceed 
their required Excess Net Capital.\53\ In the case of operational risk, 
unexpected operational events could expose NSCC to an amount in excess 
of a firm's required Excess Net Capital. In the case of cyber risk, 
cyber-attacks have the potential to inflict significant losses that 
could exceed the current minimum capital requirements.
---------------------------------------------------------------------------

    \52\ See Stress Testing Analysis, included as a Confidential 
Exhibit 3 to the filing.
    \53\ See Commission v. Alpine Sec. Corp., 982 F.3d 68 (2d Cir. 
2020) (upholding $12 million civil penalty against clearing broker-
dealer).
---------------------------------------------------------------------------

    Appreciation of these greater risks have manifested into new 
regulatory requirements for certain industry participants,\54\ 
including NSCC, requiring NSCC to maintain greater capital amounts and 
deploy enhanced risk management tools.\55\ As to which BD Members are 
arguably ``riskier'' in today's environment, NSCC's internal stress 
testing analysis \56\ highlights that BD Members with smaller capital 
bases are more likely to experience a loss that would exceed their 
current Excess Net Capital requirements,\57\ countering the commenter's 
argument that larger BD Members are riskier.\58\
---------------------------------------------------------------------------

    \54\ See, e.g., Basel Committee on Banking Supervision, Basel 
III Standards, supra note 5; Financial Stability Board, 2020 list of 
G-SIBs, supra note 4; U.S. Department of the Treasury, Designations, 
Financial Market Utility Designations, supra note 7.
    \55\ See, e.g., CCAS, supra note 10.
    \56\ See supra note 52.
    \57\ See Letter from Daniel McElligott, Executive Director, 
DTCC, to Regional Firms Council (October 24, 2019), included as a 
Confidential Exhibit 3 to the filing.
    \58\ Lek Email, supra note 40.
---------------------------------------------------------------------------

    Therefore, NSCC believes the Proposed BD Requirements are necessary 
in furtherance of the purposes of the Exchange Act, as permitted by 
Section 17A(b)(3)(I) thereunder,\59\ as the proposed changes would help 
ensure that all BD Members maintain an amount of capital that is more 
commensurate with the current industry environment and the risks it 
presents.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    NSCC believes the Proposed BD Requirements are appropriate for a 
variety of reasons. First, the new requirements are tailored to better 
reflect the volatility risk presented by BD Members. Currently, the 
minimum capital requirement for BD Members is simply an amount of 
Excess Net Capital based on membership type (i.e., a $500,000 Excess 
Net Capital requirement for those that self-clear and a $1 million 
Excess Net Capital requirement for those that clear for others), 
without considering any other risks. As described above, NSCC would not 
only continue to consider membership type, but it also proposes to use 
the daily volatility component of the BD Member's own Net Unsettled 
Positions (i.e., a measurement of the risk that the BD Member's Net 
Unsettled Positions present to NSCC) in order to more strategically 
group BD Members into tiers, with each tier being assigned a specific 
minimum capital requirement. BD Members in a greater tier would need to 
maintain higher capital requirements than those in a

[[Page 74197]]

lesser tier, commensurate with the volatility risks that the BD Members 
in each tier present to NSCC. As described above, BD Members could move 
between tiers based on sustained changes to their daily volatility 
component, thus allowing BD Members to have control over the tier in 
which they are placed and, in turn, the capital they need to maintain. 
NSCC would track VaR breaches for BD Members on a daily basis. On the 
first instance of breaching a VaR Tier, NSCC would send a letter to the 
Member informing it of the VaR breach and reminding it that four 
subsequent breaches within the next 12 months would result in a higher 
capital requirement. On the fifth instance of breaching a VaR Tier, 
NSCC would again send a letter to a Member informing it of the fifth 
breach and that the new, higher capital requirement would take effect 
in 60 days and would remain in effect for at least the next 12 months.
    In the case of new applicants for NSCC membership, as described 
above, if the Proposed BD Requirements had been in effect for the past 
two years, but newly admitted BD Members were not automatically placed 
in at least the middle VaR Tier, only one BD Member would have belonged 
in the lowest VaR Tier at admittance, and that firm would have moved to 
the middle VaR Tier in its second month of membership.\60\ As a result, 
requiring new BD Members to be placed in at least the middle VaR Tier 
at admittance would not pose an unnecessary barrier to entry that such 
BD Members would not have had to meet eventually anyway.
---------------------------------------------------------------------------

    \60\ See supra note 21.
---------------------------------------------------------------------------

    In response to specific comments that the VaR Tiers begin at too 
low of a level and that they should continue indefinitely,\61\ NSCC 
designed the tier levels to not only consider the volatility risk that 
the BD Members present to NSCC but also to make the tiers easy to 
understand and manage. NSCC believes that adding more tiers at the 
upper levels, or splitting existing tiers, would complicate the 
structure unnecessarily and make the logistics in tracking each BD 
Member as they moved between tiers unwieldy, not only for NSCC but also 
for the BD Member itself. NSCC believes the proposed tier structure 
strikes the right balance between benefit and functionality.
---------------------------------------------------------------------------

    \61\ Lek Email, supra note 40; Wachtel Letter, supra note 40.
---------------------------------------------------------------------------

    Second, while NSCC believes members must understand the risks that 
their capitalization presents to NSCC and be prepared to monitor their 
capitalization and alter their behavior in order to minimize that risk, 
as necessary, NSCC also appreciates and understands that members must 
be able to plan for their capital requirements. That is why NSCC would 
not implement the proposed changes to any of the enhanced capital 
requirements until one year after the Commission's approval of the 
proposal. During that one-year period, NSCC would periodically provide 
Members with estimates of their capital requirements. The deferred 
implementation for all members and the estimated capital requirements 
for Members are designed to give members the opportunity to assess the 
impact of their enhanced capital requirements on their business profile 
and make any changes that they deem necessary.
    Third, in response to the specific comment that the Proposed BD 
Requirements are at odds with the goals of the Exchange Act,\62\ NSCC 
believes the proposed changes are, in fact, consistent with and would 
improve upon NSCC's compliance with applicable regulatory requirements, 
as discussed above, including Section 17A(b)(3)(F) of the Exchange Act 
and Rules 17Ad-22(b)(7), (e)(4)(i), (e)(18) and (e)(19) promulgated 
thereunder.
---------------------------------------------------------------------------

    \62\ Lek Email, supra note 40.
---------------------------------------------------------------------------

    Finally, NSCC believes that the Proposed BD Requirements would 
better align NSCC's capital requirements for members with those of 
other CCPs, both in the U.S. and abroad.\63\
---------------------------------------------------------------------------

    \63\ See supra note 10.
---------------------------------------------------------------------------

    Therefore, NSCC believes the Proposed BD Requirements are 
appropriate in furtherance of the purposes of the Exchange Act, as 
permitted by Section 17A(b)(3)(I) thereunder,\64\ as the proposed 
changes are purposely tailored and structured, provide for a one-year 
implementation period, are consistent with applicable provisions of the 
Exchange Act and rules thereunder, and better align with NSCC peers.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    NSCC does not believe the proposed changes to enhance the capital 
requirements for its other members would impact competition because 
such members already meet the proposed requirements. Additionally, NSCC 
does not believe that the proposed changes to (i) redefine the Watch 
List and eliminate the enhanced surveillance list and (ii) make 
clarification changes to the Rules would impact competition. Redefining 
the Watch List and eliminating the enhanced surveillance list are 
simply intended to streamline and clarify these monitoring practices. 
If anything, by no longer automatically including Members with a CRRM 
rating of 5 on the Watch List, as proposed, the change could promote 
competition for such Members, as such Members would no longer 
automatically be subject to increased scrutiny by NSCC, including the 
possibility of increased financial and reporting obligations. 
Meanwhile, making clarification changes to the Rules to ensure that 
they remain accessible and transparent would help facilitate members' 
understanding of the Rules and provide members with increased 
predictability and certainty regarding their rights and obligations 
with respect to NSCC's clearance and settlement activities.

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

    All written comments received by NSCC have been summarized and 
responded to in Item 4 (Self-Regulatory Organization's Statement on 
Burden on Competition) above. If any additional written comments are 
received, NSCC will amend this filing to publicly file such comments as 
an Exhibit 2 to this filing, as required by Form 19b-4 and the General 
Instructions thereto.
    Persons submitting written comments are cautioned that, according 
to Section IV (Solicitation of Comments) of the Exhibit 1A in the 
General Instructions to Form 19b-4, the Commission does not edit 
personal identifying information from comment submissions. Commenters 
should submit only information that they wish to make available 
publicly, including their name, email address, and any other 
identifying information.
    All prospective commenters should follow the Commission's 
instructions on How to Submit Comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
Commission's Division of Trading and Markets at 
[email protected] or 202-551-5777.
    NSCC reserves the right 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 74198]]

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 Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSCC-2021-016 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-2021-016. 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 (https://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. 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-2021-016 and should be 
submitted on or before January 19, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\65\
---------------------------------------------------------------------------

    \65\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-28250 Filed 12-28-21; 8:45 am]
BILLING CODE 8011-01-P