mirror of
https://github.com/verymeticulous/wikAPEdia.git
synced 2025-06-28 20:27:55 -05:00
2292 lines
159 KiB
Markdown
2292 lines
159 KiB
Markdown
**[Source](https://www.dtcc.com/-/media/Files/Downloads/legal/rule-filings/2021/NSCC/SR-NSCC-2021-002.pdf)**
|
||
|
||
Notice of proposed change pursuant to the Payment, Clearing, and Settlement Act of 2010
|
||
Section 806(e)(1) * Section 806(e)(2) *
|
||
Security-Based Swap Submission pursuant
|
||
to the Securities Exchange Act of 1934
|
||
Section 3C(b)(2) *
|
||
Exhibit 2 Sent As Paper Document Exhibit 3 Sent As Paper Document
|
||
has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized.
|
||
19b-4(f)(6)
|
||
19b-4(f)(5)
|
||
Provide a brief description of the action (limit 250 characters, required when Initial is checked *).
|
||
(Name *)
|
||
NOTE: Clicking the button at right will digitally sign and lock
|
||
this form. A digital signature is as legally binding as a physical
|
||
signature, and once signed, this form cannot be changed.
|
||
Managing Director and Deputy General Counsel
|
||
(Title *)
|
||
Date 03/05/2021
|
||
Provide the name, telephone number, and e-mail address of the person on the staff of the self-regulatory organization
|
||
prepared to respond to questions and comments on the action.
|
||
Title * Executive Director and Associate General Counsel
|
||
Contact Information
|
||
19b-4(f)(4)
|
||
19b-4(f)(2)
|
||
19b-4(f)(3)
|
||
Extension of Time Period
|
||
for Commission Action *
|
||
SECURITIES AND EXCHANGE COMMISSION
|
||
WASHINGTON, D.C. 20549
|
||
Form 19b-4
|
||
Withdrawal
|
||
Fax
|
||
Jacqueline Last Name *
|
||
Filing by
|
||
Pilot
|
||
National Securities Clearing Corporation
|
||
2021 - * 002
|
||
Amendment No. (req. for Amendments *)
|
||
File No.* SR -
|
||
Chezar
|
||
jfarinella@dtcc.com
|
||
Telephone * (212) 855-3216
|
||
E-mail *
|
||
First Name *
|
||
Signature
|
||
Pursuant to the requirements of the Securities Exchange Act of 1934,
|
||
Initial * Amendment * Section 19(b)(3)(A) * Section 19(b)(3)(B) *
|
||
Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934
|
||
Description
|
||
Amend the Supplemental Liquidity Deposit Requirements
|
||
npoulos@dtcc.com
|
||
By Nikki Poulos
|
||
Section 19(b)(2) *
|
||
19b-4(f)(1)
|
||
Required fields are shown with yellow backgrounds and asterisks.
|
||
Page 1 of * 79
|
||
OMB APPROVAL
|
||
OMB Number: 3235-0045
|
||
Estimated average burden
|
||
hours per response............38
|
||
Rule
|
||
Date Expires *
|
||
If the self-regulatory organization is amending only part of the text of a lengthy
|
||
proposed rule change, it may, with the Commission's permission, file only those
|
||
portions of the text of the proposed rule change in which changes are being made if
|
||
the filing (i.e. partial amendment) is clearly understandable on its face. Such partial
|
||
amendment shall be clearly identified and marked to show deletions and additions.
|
||
Partial Amendment
|
||
Add Remove View
|
||
The self-regulatory organization may choose to attach as Exhibit 5 proposed changes
|
||
to rule text in place of providing it in Item I and which may otherwise be more easily
|
||
readable if provided separately from Form 19b-4. Exhibit 5 shall be considered part
|
||
of the proposed rule change.
|
||
Exhibit 5 - Proposed Rule Text
|
||
SECURITIES AND EXCHANGE COMMISSION
|
||
WASHINGTON, D.C. 20549
|
||
For complete Form 19b-4 instructions please refer to the EFFS website.
|
||
Copies of any form, report, or questionnaire that the self-regulatory organization
|
||
proposes to use to help implement or operate the proposed rule change, or that is
|
||
referred to by the proposed rule change.
|
||
Exhibit Sent As Paper Document
|
||
Exhibit 4 - Marked Copies
|
||
Add Remove View
|
||
Exhibit 3 - Form, Report, or Questionnaire
|
||
Add Remove
|
||
View
|
||
Exhibit 2 - Notices, Written Comments,
|
||
Transcripts, Other Communications
|
||
Add Remove
|
||
View
|
||
Exhibit 1 - Notice of Proposed Rule Change *
|
||
Add
|
||
Form 19b-4 Information *
|
||
Exhibit 1A- Notice of Proposed Rule
|
||
Change, Security-Based Swap Submission,
|
||
or Advance Notice by Clearing Agencies *
|
||
Add Remove View
|
||
Remove
|
||
Add Remove
|
||
The full text shall be marked, in any convenient manner, to indicate additions to and
|
||
deletions from the immediately preceding filing. The purpose of Exhibit 4 is to permit
|
||
the staff to identify immediately the changes made from the text of the rule with which
|
||
it has been working.
|
||
View
|
||
The self-regulatory organization must provide all required information, presented in a
|
||
clear and comprehensible manner, to enable the public to provide meaningful
|
||
comment on the proposal and for the Commission to determine whether the proposal
|
||
is consistent with the Act and applicable rules and regulations under the Act.
|
||
View
|
||
Exhibit Sent As Paper Document
|
||
The Notice section of this Form 19b-4 must comply with the guidelines for publication
|
||
in the Federal Register as well as any requirements for electronic filing as published
|
||
by the Commission (if applicable). The Office of the Federal Register (OFR) offers
|
||
guidance on Federal Register publication requirements in the Federal Register
|
||
Document Drafting Handbook, October 1998 Revision. For example, all references to
|
||
the federal securities laws must include the corresponding cite to the United States
|
||
Code in a footnote. All references to SEC rules must include the corresponding cite
|
||
to the Code of Federal Regulations in a footnote. All references to Securities
|
||
Exchange Act Releases must include the release number, release date, Federal
|
||
Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
|
||
-xx-xx). A material failure to comply with these guidelines will result in the proposed
|
||
rule change being deemed not properly filed. See also Rule 0-3 under the Act (17
|
||
CFR 240.0-3)
|
||
The Notice section of this Form 19b-4 must comply with the guidelines for publication
|
||
in the Federal Register as well as any requirements for electronic filing as published
|
||
by the Commission (if applicable). The Office of the Federal Register (OFR) offers
|
||
guidance on Federal Register publication requirements in the Federal Register
|
||
Document Drafting Handbook, October 1998 Revision. For example, all references to
|
||
the federal securities laws must include the corresponding cite to the United States
|
||
Code in a footnote. All references to SEC rules must include the corresponding cite
|
||
to the Code of Federal Regulations in a footnote. All references to Securities
|
||
Exchange Act Releases must include the release number, release date, Federal
|
||
Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
|
||
-xx-xx). A material failure to comply with these guidelines will result in the proposed
|
||
rule change, security-based swap submission, or advance notice being deemed not
|
||
properly filed. See also Rule 0-3 under the Act (17 CFR 240.0-3)
|
||
Copies of notices, written comments, transcripts, other communications. If such
|
||
documents cannot be filed electronically in accordance with Instruction F, they shall be
|
||
filed in accordance with Instruction G.
|
||
Add Remove View
|
||
Required fields are shown with yellow backgrounds and asterisks.
|
||
Page 3 of 79
|
||
1. Text of the Proposed Rule Change
|
||
(a) The proposed rule change of National Securities Clearing Corporation (“NSCC”)
|
||
is annexed hereto as Exhibit 5 and consists of modifications to Rule 4(A) (Supplemental
|
||
Liquidity Deposits) of the NSCC’s Rules & Procedures (“Rules”) to (1) calculate and collect,
|
||
when applicable, supplemental liquidity deposits to NSCC’s Clearing Fund (“Supplemental
|
||
Liquidity Deposits,” or “SLD”) on a daily basis rather than only in advance of the monthly
|
||
expiration of stock options (defined in Rule 4(A) as “Options Expiration Activity Period”);
|
||
(2) establish an intraday SLD obligation that would apply in advance of Options Expiration
|
||
Activity Periods and may also be applied on other days, as needed; (3) implement an alternative
|
||
pro rata calculation of Members’ SLD obligations that may apply in certain circumstances; and
|
||
(4) simplify and improve the transparency of the description of the calculation, collection and
|
||
treatment of SLD in Rule 4(A) of the Rules, as described in greater detail below.1
|
||
(b) Not applicable.
|
||
(c) Not applicable.
|
||
2. Procedures of the Self-Regulatory Organization
|
||
The proposal was approved by the Risk Committee of the Board of Directors of NSCC
|
||
on May 21, 2020.
|
||
3. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis
|
||
for, the Proposed Rule Change
|
||
(a) Purpose
|
||
NSCC is proposing to enhance its management of the liquidity risks that arise in or are
|
||
borne by it by calculating and collecting, when applicable, SLD on each Business Day rather
|
||
than only in advance of Options Expiration Activity Periods. The proposed changes would
|
||
establish an intraday SLD obligation that would apply in advance of Options Expiration Activity
|
||
Periods and may be applicable on any Business Day, as needed. The proposal would also
|
||
implement an alternative pro rata calculation of Members’ SLD obligations that may apply in
|
||
certain circumstances. Finally, in connection with these proposed changes, NSCC would
|
||
simplify and improve the description of the calculation, collection and treatment of SLD in Rule
|
||
4(A). These proposed rule changes are described in greater detail below.
|
||
(i) Overview of the NSCC Liquidity Risk Management
|
||
NSCC, along with its affiliates, The Depository Trust Company and Fixed Income
|
||
Clearing Corporation, maintains a Clearing Agency Liquidity Risk Management Framework
|
||
(“Framework”) that sets forth the manner in which NSCC measures, monitors and manages the
|
||
1
|
||
Capitalized terms not defined herein are defined in the Rules, available at
|
||
http://dtcc.com/~/media/Files/Downloads/legal/rules/nscc_rules.pdf.
|
||
Page 4 of 79
|
||
liquidity risks that arise in or are borne by it.2
|
||
As a central counterparty, NSCC’s liquidity needs
|
||
are driven by the requirement to complete end-of-day money settlement, on an ongoing basis, in
|
||
the event NSCC ceases to act for a Member (hereinafter referred to as a “default”).3
|
||
If a Member
|
||
defaults, NSCC needs to complete settlement of guaranteed transactions on the defaulted
|
||
Member’s behalf from the date of default through the remainder of the settlement cycle. As
|
||
such, and as provided for in the Framework, NSCC measures the sufficiency of its qualifying
|
||
liquid resources through daily liquidity studies across a range of scenarios, including amounts
|
||
NSCC would need in the event the Member or Member family with the largest aggregate
|
||
liquidity exposure defaults.4
|
||
|
||
As described in the Framework, NSCC seeks to maintain qualifying liquid resources in
|
||
an amount sufficient to cover this risk. These resources currently include (1) cash deposits to the
|
||
NSCC Clearing Fund;5
|
||
(2) the proceeds of the issuance and private placement of (a) short-term,
|
||
unsecured notes in the form of commercial paper and extendable notes (“Commercial Paper
|
||
Program”),6
|
||
and (b) term debt (“Term Debt Issuance”);7
|
||
(3) cash that would be obtained by
|
||
drawing on NSCC’s committed 364-day credit facility with a consortium of banks (“Line of
|
||
Credit”);8
|
||
and (4) Supplemental Liquidity Deposits, collected pursuant to Rule 4(A), which are
|
||
currently designed to cover the heightened liquidity exposure arising around Options Expiration
|
||
2
|
||
See Securities Exchange Act Release No. 82377 (December 21, 2017), 82 FR 61617
|
||
(December 28, 2017) (File Nos. SR-DTC-2017-004; SR-FICC-2017-008; SR-NSCC2017-005).
|
||
3
|
||
The Rules identify when NSCC may cease to act for a Member and the types of actions
|
||
NSCC may take. For example, NSCC may suspend a firm’s membership with NSCC or
|
||
prohibit or limit a Member’s access to NSCC’s services in the event that Member
|
||
defaults on a financial or other obligation to NSCC. See Rule 46 (Restrictions on Access
|
||
to Services) of the Rules, supra note 1.
|
||
4
|
||
“Qualifying liquid resources” are defined in Rule 17Ad-22(a)(14) under the Securities
|
||
Exchange Act of 1934 (“Act”). 17 CFR 240.17Ad-22(a)(14). The Framework also
|
||
includes a definition of qualifying liquid resources that incorporates by reference Rule
|
||
17Ad-22(a)(14). See supra note 2.
|
||
5
|
||
See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
|
||
Matters) of the Rules, supra note 1.
|
||
6
|
||
See Securities Exchange Act Release Nos. 75730 (August 19, 2015), 80 FR 51638
|
||
(August 25, 2015) (File No. SR-NSCC-2015-802); 82676 (February 9, 2018), 83 FR
|
||
6912 (February 15, 2018) (File No. SR-NSCC-2017-807).
|
||
7
|
||
See Securities Exchange Act Release No. 88146 (February 7, 2020), 85 FR 8046
|
||
(February 12, 2020) (File No. SR-NSCC-2019-802).
|
||
8
|
||
See Securities Exchange Act Release No. 80605 (May 5, 2017), 82 FR 21850 (May 10,
|
||
2017) (File Nos. SR-DTC-2017-802; SR-NSCC-2017-802).
|
||
Page 5 of 79
|
||
Activity Periods, required from those Members whose activity would pose the largest liquidity
|
||
exposure to NSCC.9
|
||
|
||
NSCC’s liquidity risk management has evolved in order to adhere to regulatory
|
||
requirements that were adopted after Rule 4(A) was implemented.10 As part of its efforts to
|
||
maintain compliance with these requirements, NSCC has continued to strengthen its liquidity
|
||
risk management strategy, including through growing and diversifying its qualifying liquid
|
||
resources. In connection with these ongoing efforts, NSCC is proposing to calculate and collect,
|
||
when applicable, SLD every Business Day rather than only in connection with Options
|
||
Expiration Activity Periods. This proposed change would improve NSCC’s ability to measure
|
||
and monitor its daily liquidity exposures and allow it to collect additional qualifying liquid
|
||
resources from Members whose activity poses the largest liquidity exposure to NSCC in
|
||
connection with their daily settlement activity, and not only during Options Expiration Activity
|
||
Periods. By measuring SLD against Members’ actual daily settlement activity and NSCC’s
|
||
available qualifying liquid resources, the proposal would also help mitigate risks to NSCC that it
|
||
is unable to secure adequate default liquidity from other sources in an amount necessary to meet
|
||
its liquidity needs. For example, the proposal would help mitigate the risks that could arise if
|
||
investor demand for the short-term notes issued under the Commercial Paper Program weakens,
|
||
there is limited investor demand for term debt issued pursuant to a Term Debt Issuance, or
|
||
NSCC is unable to renew its Line of Credit at the targeted amount.
|
||
NSCC is also proposing to establish an intraday SLD obligation that would apply on the
|
||
first Business Day of the Options Expiration Activity Period to allow NSCC to continue to
|
||
mitigate the additional liquidity exposures presented by options activity. The proposal would
|
||
also permit NSCC to calculate and collect an intraday SLD on any Business Day when, for
|
||
example, NSCC believes that it is necessary to collect an additional SLD from a Member whose
|
||
activity presents relatively greater risks to the NSCC on an overnight basis.
|
||
NSCC is also proposing to implement an alternative calculation of Members’ SLD
|
||
requirements that would be their pro rata allocation of the largest SLD obligation calculated for
|
||
that Business Day. This proposed change would provide NSCC with the discretion, in certain
|
||
circumstances, to allocate its largest liquidity need on a Business Day among those Members that
|
||
are required to pay SLD on that day rather than collect separate SLD from those Members, as
|
||
described in greater detail below.
|
||
In connection with these proposed changes, NSCC would also simplify the description of
|
||
the calculation of SLD in Rule 4(A) in order to improve the transparency of this Rule, as
|
||
described in greater detail below.
|
||
9
|
||
See Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, supra note 1. See also
|
||
Securities Exchange Act Release Nos. 70999 (December 5, 2013), 78 FR 75413
|
||
(December 11, 2013) (File No. SR-NSCC-2013-02); 71000 (December 5, 2013), 78 FR
|
||
75400 (December 11, 2013) (File No. SR-NSCC-2013-802).
|
||
10 See 17 CFR 240.17Ad-22(e)(7). See also supra note 2.
|
||
Page 6 of 79
|
||
(ii) Current Rule 4(A) and Supplemental Liquidity Deposits
|
||
Under the current Rule 4(A), NSCC collects SLD from the unaffiliated Members and
|
||
families of affiliated Members (each defined as an “Affiliated Family”) that incur the largest
|
||
gross settlement debits over the settlement cycle during times of increased trading activity that
|
||
arise around Options Expiration Activity Periods.11
|
||
Under the current Rule 4(A), NSCC performs calculations on a monthly basis, no later
|
||
than the fifth day prior to an Options Expiration Activity Period, using activity observed over a
|
||
24-month lookback period (defined in the current Rule 4(A) as the “Special Activity Lookback
|
||
Period”).12 These calculations determine (1) NSCC’s largest liquidity need that exceeded its
|
||
liquidity resources (defined in Rule 4(A) as “Special Activity Peak Liquidity Need”); and (2) the
|
||
30 (or fewer) unaffiliated Members or Affiliated Families (defined in Rule 4(A) as “Special
|
||
Activity Liquidity Providers”) that presented the largest liquidity exposures to NSCC (defined in
|
||
Rule 4(A) as “Special Activity Peak Liquidity Exposures”).13 To determine the SLD obligations
|
||
of each Special Activity Liquidity Provider, the calculated Special Activity Peak Liquidity Need
|
||
of NSCC is allocated to these Special Activity Liquidity Providers in proportion to the Special
|
||
Activity Peak Liquidity Exposures they presented to NSCC during the Special Activity
|
||
Lookback Period. Special Activity Liquidity Providers are required to fund their SLD
|
||
obligations by the close of business on the second day prior to the applicable Options Expiration
|
||
Activity Period.14 SLD may be returned to Special Activity Liquidity Providers seven Business
|
||
Days after the end of the applicable Options Expiration Activity Period.15
|
||
On any Business Day between calculation dates, if NSCC observes an increase in its
|
||
liquidity needs that exceeds a predetermined threshold amount, it may call for an additional
|
||
deposit from the Member whose increase in activity levels caused (or was the primary cause of)
|
||
such increased liquidity need (defined in Rule 4(A) as “Special Activity Liquidity Call”).16
|
||
NSCC may hold deposits made pursuant to a Special Activity Liquidity Call for up to 90 days
|
||
after the deposit is made.17 Members are also permitted to submit a cash deposit to the Clearing
|
||
Fund as a “Special Activity Prefund Deposit” no later than the first Business Day of an Options
|
||
11 See Section 2 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, supra note 1.
|
||
12 See id.
|
||
13 See Section 3 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
14 See Section 4 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
15 See Section 9 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
16 See Section 7 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
17 See Section 10 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
Page 7 of 79
|
||
Expiration Activity Period.18 NSCC understands that a Member would generally make a Special
|
||
Activity Prefund Deposit when it anticipates that its Special Activity Peak Liquidity Exposure
|
||
during that period may be greater than the amount calculated by NSCC pursuant to Rule 4(A)
|
||
based on activity in the Special Activity Lookback Period.19
|
||
The current Rule 4(A) also addresses how SLD are treated generally.20 Specifically,
|
||
while SLD are part of a Member’s actual deposit to the Clearing Fund, they are made in addition
|
||
to a Member’s Required Fund Deposit and any other deposit of any such Member to the Clearing
|
||
Fund.21 Rule 4(A) also provides that SLD may be invested and may be used to satisfy a loss or
|
||
liability as provided for in Sections 3 or 13 of Rule 4, and addresses NSCC’s obligation to
|
||
provide Members with certain information that would help them anticipate their potential SLD
|
||
requirements.22
|
||
(iii) Amended Rule 4(A) and Proposed Daily Calculation of Supplemental
|
||
Liquidity Deposits
|
||
In order to better address the liquidity risks presented by Members’ daily activity, NSCC
|
||
is proposing to amend Rule 4(A) to calculate and collect, when applicable, SLD every Business
|
||
Day rather than only in connection with the monthly expiration of stock options. While the
|
||
monthly expiration of stock options does present larger liquidity exposures to NSCC, NSCC may
|
||
also face large liquidity exposures from Members’ daily activity, particularly during volatile
|
||
market conditions. By allowing NSCC to calculate and collect SLD daily, NSCC would be able
|
||
to identify these exposures based on Members’ daily activity rather than estimate its upcoming
|
||
liquidity exposures based on activity observed over a lookback period. The proposal would help
|
||
NSCC mitigate its liquidity risks through the daily collection of SLD from those Members’
|
||
whose daily activity would, in the event of the Member’s default, create a potential liquidity
|
||
need that is in excess of NSCC’s available qualifying liquid resources. The proposal would also
|
||
permit NSCC to return SLD to Members on the Business Day following the day those deposits
|
||
are collected and would remove the current requirement that SLD be held for up to 90 days.
|
||
In order to implement this proposed change to the timing of the SLD, NSCC would make
|
||
a number of changes to Rule 4(A), described below. The proposed changes to Rule 4(A) would
|
||
implement a daily calculation and collection of SLD, simplify and clarify the calculations done
|
||
in connection with the SLD requirements, and enhance the disclosures of the SLD requirements.
|
||
18 See definition of “Special Activity Prefund Deposit” in Section 2 of Rule 4(A)
|
||
(Supplemental Liquidity Deposits) of the Rules, id.
|
||
19 See id.
|
||
20 See Section 13 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
21 See Section 13(b) of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
22 See Section 13(c) and Section 14 of Rule 4(A) (Supplemental Liquidity Deposits) of the
|
||
Rules, id.
|
||
Page 8 of 79
|
||
Despite these proposed changes, the structure of Rule 4(A) and the fundamental mechanics of
|
||
the SLD requirements would be unchanged.
|
||
Proposed Daily Calculation of Supplemental Liquidity Deposits
|
||
Supplemental Liquidity Providers. Under the proposed Rule 4(A), each Business Day
|
||
NSCC would determine the 30 (or fewer) Members (each such Member a “Supplemental
|
||
Liquidity Provider”) that had the “Peak Liquidity Need,” which would be defined as the largest
|
||
Daily Liquidity Need that NSCC would have for that Member or Affiliated Family in a
|
||
“Lookback Period.” 23 For purposes of this calculation, Daily Liquidity Need would be defined
|
||
as the amount of liquid resources needed to effect the settlement of NSCC’s payment obligations
|
||
as a central counterparty over a three day settlement cycle, assuming the default of that Member
|
||
on that day.
|
||
As described above, Supplemental Liquidity Providers are currently identified by
|
||
reviewing Members’ Special Activity Peak Liquidity Exposures over the Lookback Period.
|
||
Under the proposed approach, NSCC would base this determination on Members’ Peak Liquidity
|
||
Need, which would continue to identify those Members whose activity posed the largest liquidity
|
||
risks to NSCC during the Lookback Period. The proposed approach would no longer require a
|
||
calculation using NSCC’s available liquid resources on each day in the Lookback Period but
|
||
would use a simpler approach by looking only at liquidity need. The proposed approach to use a
|
||
simpler calculation would reduce the risk of error and would clarify the description of how
|
||
NSCC would identify Supplemental Liquidity Providers in the proposed Rule 4(A), making it
|
||
more predictable to Members.
|
||
Supplemental Liquidity Obligation. After NSCC determines the Supplemental Liquidity
|
||
Providers, NSCC would then determine if any of the Supplemental Liquidity Providers would be
|
||
required to pay an SLD on that Business Day. The proposed Rule 4(A) would use a simplified
|
||
calculation by determining if the Daily Liquidity Need for each Supplemental Liquidity Provider
|
||
on that Business Day exceeds the sum of NSCC’s qualifying liquid resources available to NSCC
|
||
on that day, assuming stressed market conditions (described below) (defined in the proposed
|
||
Rule 4(A) as “Qualifying Liquid Resources”). The result of that calculation would be a
|
||
Supplemental Liquidity Provider’s SLD requirement (defined in the proposed Rule 4(A) as a
|
||
“Supplemental Liquidity Obligation”) for that day. If the Daily Liquidity Need of a
|
||
Supplemental Liquidity Provider does not exceed NSCC’s Qualifying Liquid Resources on that
|
||
day, then it would not have a Supplemental Liquidity Obligation.
|
||
Because this calculation would be done at the start of each Business Day (as discussed
|
||
further below), it would be based on the Qualifying Liquid Resources, including Required Fund
|
||
Deposits to the Clearing Fund, available to NSCC as of the end of the prior Business Day.
|
||
23 The “Lookback Period” would continue to be defined as 24 months, or a longer period as
|
||
determined by NSCC in its discretion. NSCC may adjust the Lookback Period if, for
|
||
example, unusual activity observed in the Lookback Period is not an appropriate indicator
|
||
of future settlement activity and causes a Member to be a Supplemental Liquidity
|
||
Provider. See Section 2 (Defined Terms) of Rule 4(A), id.
|
||
Page 9 of 79
|
||
Additionally, in order to anticipate market conditions that could cause Qualifying Liquid
|
||
Resources to be unavailable on that day, NSCC would apply stress scenarios in determining its
|
||
total Qualifying Liquid Resources for purposes of Rule 4(A). Currently, NSCC applies stress
|
||
scenarios in determining the Special Activity Daily Liquidity Need and, in practice, they are
|
||
currently applied to the Other Qualifying Liquid Resources in this calculation under the current
|
||
Rule 4(A).24 The proposed change would allow NSCC to continue to assume stressed markets in
|
||
its SLD calculations, which protects it against unexpected market events.25 The proposed
|
||
changes to Rule 4(A) would make it clearer how these stress scenarios are applied.
|
||
Under this proposed calculation, NSCC would no longer need to estimate the potential
|
||
liquidity need a Member’s activity could pose to NSCC based on activity that settled in the
|
||
Lookback Period. Instead, the Supplemental Liquidity Obligation of a Member would be
|
||
calculated based on the actual liquidity exposure that its daily activity would pose to NSCC on
|
||
that particular day in the event of that Member’s default. The proposed change provides both
|
||
NSCC and Members with a more reliable measure of the liquidity risks posed to NSCC by its
|
||
Members’ daily settlement activity in calculating SLD requirements.
|
||
Each Supplemental Liquidity Provider that has a Supplemental Liquidity Obligation on a
|
||
Business Day would receive a notice from NSCC of the amount of its Supplemental Liquidity
|
||
Obligation and would be required to make a deposit in that amount to the Clearing Fund within
|
||
one hour of such notice. The proposed timing of funding a Supplemental Liquidity Obligation
|
||
would mirror the current requirement that is applied to Members’ Required Fund Deposits,
|
||
which is also calculated and collected daily, and must be funded within one hour of demand.26
|
||
Specifically, NSCC expects to deliver notification of Supplemental Liquidity Obligations to
|
||
Supplemental Liquidity Providers by around 8:30 AM ET each Business Day, with deposits
|
||
required by no later than 9:30 AM ET.
|
||
Proposed Pro Rata Calculation of Supplemental Liquidity Obligations. As an alternative
|
||
to the calculation of Supplemental Liquidity Obligations described above, proposed Rule 4(A)
|
||
would also state that, in the event two or more Supplemental Liquidity Providers have a
|
||
Supplemental Liquidity Obligation of more than $2 billion on a Business Day, calculated
|
||
pursuant to the calculation described above, NSCC may determine the Supplemental Liquidity
|
||
24 Current Rule 4(A) uses the defined term “Other Qualifying Liquid Resources” to refer to
|
||
NSCC’s qualifying liquid resources other than the Clearing Fund and the Line of Credit.
|
||
See Section 2 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
25 NSCC would apply the same stress scenarios that it currently applies, which include the
|
||
market shocks of 1987, and removing the largest commitment to the Line of Credit,
|
||
excess deposits to the Clearing Fund on deposit and proceeds from issued commercial
|
||
paper that is maturing within five Business Days from NSCC’s Qualifying Liquid
|
||
Resource. Any changes to these stress scenarios would be announced by an Important
|
||
Notice posted to NSCC’s website.
|
||
26 See Section II(B) of Procedure XV (Clearing Fund Formula and Other Matters) of the
|
||
Rules, supra note 1.
|
||
Page 10 of 79
|
||
Obligation of all Supplemental Liquidity Providers on that day would be their pro rata share of
|
||
the largest Supplemental Liquidity Obligation calculated on that Business Day.27
|
||
This proposed alternative calculation of the Supplemental Liquidity Obligations would
|
||
provide NSCC with the option of collecting only the largest SLD calculated on a Business Day,
|
||
allocated among each of the Supplemental Liquidity Providers. The purpose of this proposed
|
||
provision is to provide NSCC with the option of collecting enough funds to meet its regulatory
|
||
requirements in circumstances when the aggregate Supplemental Liquidity Obligations on a
|
||
particular day would significantly exceed that amount. Therefore, NSCC has structured this
|
||
provision to be available only if two or more Supplemental Liquidity Providers owe SLD of
|
||
more than $2 billion. NSCC has never had two more Supplemental Liquidity Providers owe
|
||
more than $2 billion in SLD on a calculation date since Rule 4(A) was adopted. Therefore,
|
||
NSCC believes this alternative calculation would only be available in very limited
|
||
circumstances. Furthermore, NSCC believes the threshold of $2 billion is appropriate as it
|
||
would only permit this alternative calculation in circumstances when it would have a material
|
||
impact on the allocation of Supplemental Liquidity Obligations among the Supplemental
|
||
Liquidity Providers.
|
||
In such circumstances, when multiple Members have relatively large Supplemental
|
||
Liquidity Obligations of more than $2 billion, NSCC would have the option to determine if it is
|
||
appropriate to collect the largest SLD calculated for that Business Day, divided pro rata among
|
||
the Supplemental Liquidity Providers rather than collect the each of the Supplemental Liquidity
|
||
Obligations of those firms. NSCC may determine, for example, that, in certain market
|
||
conditions, this approach would be appropriate to alleviate liquidity pressures on Supplemental
|
||
Liquidity Providers. This alternative calculation would allow NSCC to collect sufficient
|
||
qualifying liquid resources to meet its regulatory obligations with respect to liquidity risk
|
||
management without requiring all of the Supplemental Liquidity Providers to fund the total
|
||
amount of their calculated Supplemental Liquidity Obligation on that Business Day.28
|
||
27 As an example, the Supplemental Liquidity Obligations for three Supplemental Liquidity
|
||
Providers on a Business Day are – Member A: $6 billion, Member B: $2 billion and
|
||
Member C: $1 billion. If NSCC determines, in its sole discretion, to calculate their
|
||
Supplemental Liquidity Obligations on a pro-rata basis, then their Supplemental
|
||
Liquidity Obligations would be – Member A: $4 billion (or 6/9 of the largest
|
||
Supplemental Liquidity Obligation of $6 billion), Member B: $1.3 billion (or 2/9 of the
|
||
$6 billion) and Member C: $700 million (or 1/9 of the $6 billion). The notice provided to
|
||
each Supplemental Liquidity Provider on that Business Day would inform those
|
||
Members that this pro-rata calculation was applied.
|
||
28 Rule 17Ad-22(e)(7)(i) under the Act requires, in part, that NSCC maintain sufficient
|
||
liquid resources at the minimum to effect same-day settlement of payment obligations
|
||
with a high degree of confidence under a wide range of foreseeable stress scenarios,
|
||
including the default of the participant family that would generate the largest aggregate
|
||
payment obligation for the covered clearing agency in extreme but plausible market
|
||
conditions. 17 CFR 240.17Ad-22(e)(7)(i).
|
||
Page 11 of 79
|
||
Intraday Supplemental Liquidity Calls. The proposed Rule 4(A) would also establish
|
||
Intraday Supplemental Liquidity Calls that would replace the current Special Activity Liquidity
|
||
Calls. The existing Special Activity Liquidity Calls are designed to address increases in NSCC’s
|
||
liquidity need between calculation dates. The proposed Intraday Supplemental Liquidity Calls
|
||
would serve a similar function, allowing NSCC to calculate and collect additional SLD on an
|
||
intraday basis if a Supplemental Liquidity Provider’s increased activity levels or projected
|
||
settlement activity causes NSCC’s Daily Liquidity Need to exceed NSCC’s Qualifying Liquid
|
||
Resources. This proposed provision would assist NSCC in mitigating increased liquidity
|
||
exposures in specified circumstances.
|
||
First, proposed Rule 4(A) would establish a monthly Intraday Supplemental Liquidity
|
||
Call that is calculated and collected, when applicable, on the first Business Day of an Options
|
||
Expiration Activity Period, which is typically a Friday.29 This Intraday Supplemental Liquidity
|
||
Call would be calculated as the difference between (1) NSCC’s Daily Liquidity Need,
|
||
recalculated to account for both actual settlement activity submitted to NSCC over the course of
|
||
Business Day and projected activity in stock options that is expected to be submitted to NSCC30
|
||
and (2) NSCC’s Qualifying Liquid Resources. Settlement activity may net with (and offset) the
|
||
activity that NSCC uses in re-calculating the Daily Liquidity Need. In order to account for any
|
||
potential offsetting settling activity, NSCC would adjust the re-calculated Daily Liquidity Need
|
||
using an estimated netting percentage that is based on each Supplemental Liquidity Provider’s
|
||
average percentage of netting observed over the prior 24 months. Under this proposed provision,
|
||
NSCC would adjust the amount of SLD it collects in order to mitigate the increased liquidity
|
||
exposures related to the monthly expiration of stock options.
|
||
Second, proposed Rule 4(A) would allow NSCC to call for additional SLD on an intraday
|
||
basis on any Business Day if a Supplemental Liquidity Provider’s increased activity levels
|
||
causes NSCC’s Daily Liquidity Need to exceed NSCC’s Qualifying Liquid Resources and
|
||
NSCC determines, in its sole discretion, that it is appropriate to require an additional intraday
|
||
SLD from that Supplemental Liquidity Provider in order to mitigate those additional liquidity
|
||
exposures. Under this proposed change, NSCC would have the ability to make an Intraday
|
||
Supplemental Liquidity Call on any Business Day. The amount of an Intraday Supplemental
|
||
Liquidity Call would be the difference between NSCC’s Daily Liquidity Need, recalculated for
|
||
that Business Day taking into account any increase in settlement activity, and NSCC’s
|
||
Qualifying Liquid Resources. This proposed provision would allow NSCC to adjust the amount
|
||
of SLD it collects for a Business Day in circumstances when NSCC believes it is necessary to
|
||
29 The proposed Rule 4(A) will retain the existing definition of an Options Expiration
|
||
Activity Period for purposes of this monthly Intraday Supplemental Liquidity Call.
|
||
30 Each Business Day, NSCC receives information regarding projected settlement activity
|
||
from The Options Clearing Corporation pursuant to a Stock and Futures Settlement
|
||
Agreement (“OCC Accord”). The OCC Accord provides for the clearance and settlement
|
||
of exercises and assignments of options on eligible securities or the maturity of eligible
|
||
stock futures contracts through NSCC. See Securities Exchange Act Release No. 81260
|
||
(July 31, 2017), 82 FR 36484 (August 4, 2017) (File Nos. SR-NSCC-2017-803;
|
||
SR-OCC-2017-804).
|
||
Page 12 of 79
|
||
accelerate the collection of additional SLD from Supplemental Liquidity Providers whose
|
||
activity may present relatively greater risks to the NSCC on an overnight basis. NSCC would
|
||
determine if an Intraday Supplemental Liquidity Call is appropriate based on a variety of factors
|
||
and circumstances, including, but not limited to, an assessment of a Supplemental Liquidity
|
||
Provider’s ability to meet its projected settlement or Supplemental Liquidity Obligations and
|
||
estimates of settlement activity that could offset settlement exposures and are not reflected in
|
||
NSCC’s liquidity estimates.
|
||
Returns of SLD and Miscellaneous Matters. Proposed Rule 4(A) would provide that
|
||
NSCC would return SLD, including any SLD funded pursuant to an Intraday Supplemental
|
||
Liquidity Call, on the next Business Day unless such amounts are held longer by NSCC pursuant
|
||
to proposed Section 12a of Rule 4(A), as described below. Under the current Rule 4(A), NSCC
|
||
may hold SLD for up to seven Business Days after the end of the applicable Options Expiration
|
||
Activity Period and may hold SLD funded pursuant to a Special Activity Liquidity Call for up to
|
||
90 days after such deposit is made. Under the proposed change, because NSCC would
|
||
recalculate the Supplemental Liquidity Obligations each Business Day, NSCC would no longer
|
||
need to hold SLD for these extended periods.
|
||
NSCC would amend proposed Section 12a (currently Section 13a) of Rule 4(A) to clarify
|
||
that SLD, as part of Members’ actual deposit to the Clearing Fund, would be subject to the
|
||
provision of Section 9 of Rule 4. Section 9 of Rule 4 addresses NSCC’s right to withhold all or
|
||
any part of any excess deposit of a Member if such Member has been placed on the Watch List
|
||
pursuant to the Rules or if NSCC determines that the Member’s anticipated activities in NSCC in
|
||
the near future may reasonably be expected to be materially different than its activities of the
|
||
recent past.31 Current Section 13a of Rule 4(A) addresses how SLD are treated pursuant to other
|
||
Rules, particularly Rule 4, which addresses Members’ deposits to the Clearing Fund. While this
|
||
proposal would not change NSCC’s rights with respect to these funds, it would provide Members
|
||
with greater transparency into how SLD are treated under Rule 4.
|
||
NSCC would also amend the provision in Rule 4(A) that addresses when SLD would be
|
||
returned to a Member that ceases to be a participant. Currently, Rule 4(A) states that SLD are
|
||
not subject to Section 7 of Rule 4 (which addresses how Required Fund Deposits are returned to
|
||
retired Members) and, as such, are returned to retired Members as otherwise provided for in Rule
|
||
4(A).32 Under the proposed Rule 4(A), because NSCC would be able to calculate SLD each
|
||
Business Day, it would return SLD on the Business Day following the calculation date.
|
||
However, while a firm may still have unsettled activity on the day it retires, NSCC would not be
|
||
able to collect SLD on the days following a Member’s retirement. Therefore, NSCC is
|
||
proposing to amend Rule 4(A) to require that SLD of a retired Member be treated similarly to
|
||
other cash Required Fund Deposits to the Clearing Fund and be held by NSCC for 30 calendar
|
||
31 For example, this may occur when an index rebalancing occurs shortly after a month-end
|
||
options expiration period, which could cause an increase in NSCC’s liquidity exposures.
|
||
32 Section 7 of Rule 4 provides that Required Fund Deposits to the Clearing Fund in the
|
||
form of cash and securities are returned to retired Members within 30 calendar days after
|
||
all of its transactions have settled and obligations have been satisfied. See supra note 1.
|
||
Page 13 of 79
|
||
days after any of its open transactions have settled and obligations have been satisfied. This
|
||
proposed change would protect NSCC from liquidity risks presented by open transactions in the
|
||
days following a firm’s retirement and would align the treatment of these funds with the
|
||
treatment of Required Fund Deposits of retired Members.
|
||
The proposed Rule 4(A) would also simplify the additional miscellaneous provisions
|
||
applicable to SLD, which address, for example, NSCC’s right to debit Members’ accounts at
|
||
NSCC if a Supplemental Liquidity Provider fails to meet its Supplemental Liquidity Obligation,
|
||
and the information NSCC makes available to Supplemental Liquidity Providers each Business
|
||
Day regarding SLD calculations. While the proposed changes would update and simplify these
|
||
provisions, they would not significantly alter the structure of these provisions, as described
|
||
below.
|
||
Proposed Changes to Rule 4(A)
|
||
The proposal described above would be implemented into the Rules by amending the
|
||
current Rule 4(A). The specific changes to implement the proposal are described below.
|
||
Section 1 (Overview). NSCC is proposing changes to Section 1 of Rule 4(A) to simplify
|
||
the descriptions by removing outdated and unnecessary language. Section 1 of Rule 4(A) would
|
||
continue to provide the rationale for the SLD requirement, by describing NSCC’s liquidity needs
|
||
and how the SLD requirements are designed to contribute to meeting those needs. However, the
|
||
proposed changes would simplify this section by removing a statement that specifically identifies
|
||
two of NSCC’s principal sources of liquidity and would instead more generally refer to NSCC’s
|
||
sources of liquidity. The proposed changes to Section 1 of Rule 4(A) would also remove
|
||
references to options expiration activity periods, which would no longer be applicable to the
|
||
SLD requirement under this proposal.
|
||
Section 2 (Defined Terms). NSCC is proposing several changes to Section 2 of Rule 4(A)
|
||
in order to implement this proposal. As described below, the proposed changes to the defined
|
||
terms address the change in timing of the SLD requirement to occur each Business Day and
|
||
would improve the transparency of Rule 4(A) through simplified and clearer defined terms.
|
||
First, Section 2 of proposed Rule 4(A) would remove the definition of “Special Activity
|
||
Calculation Date,” which is tied to the monthly Options Expiration Activity Period, and instead
|
||
would use the term “Business Day” throughout proposed Rule 4(A), where appropriate.
|
||
Business Day is currently defined in Rule 1 as any day on which NSCC is open for business.
|
||
Therefore, this proposed change would provide for the calculation of SLD requirements on each
|
||
day that NSCC is open for business.
|
||
Second, Section 2 of the proposed Rule 4(A) revise other defined terms that use the
|
||
phrase “Special Activity” to either remove that phrase or, when appropriate, to replace this
|
||
phrase with the term “Supplemental.” For example, NSCC would revise the defined term
|
||
“Special Activity Daily Liquidity Need” to “Daily Liquidity Need,” and would revise the defined
|
||
term “Special Activity Liquidity Provider” to “Supplemental Liquidity Provider.” The phrase
|
||
“Special Activity” was used in the current Rule 4(A) to refer to the Options Expiration Activity
|
||
Period, which would only be applicable to the monthly intraday SLD in the proposed Rule 4(A).
|
||
Page 14 of 79
|
||
NSCC would also update the definition of Daily Liquidity Need to change a reference
|
||
from a four-day settlement cycle to a three-day settlement cycle, to reflect the amendment to
|
||
Rule 15c6-1(a) under the Act to shorten the standard settlement cycle for most broker-dealer
|
||
transactions.33 Additionally, NSCC would move the defined term for “Options Expiration
|
||
Activity Period” within Section 2 of the proposed Rule 4(A) so it continues to appear
|
||
alphabetically, but is not proposing to change the definition of this term.
|
||
Third, the proposed changes to Section 2 of Rule 4(A) would include one defined term
|
||
for “Qualifying Liquid Resources” to refer to all default liquidity resources available to NSCC to
|
||
settle its payment obligations as a central counterparty. As discussed in greater detail above, the
|
||
defined term would provide that NSCC may apply stressed market assumptions to its Qualifying
|
||
Liquid Resources when applying these resources in the calculations made under Rule 4(A). In
|
||
connection with this proposed change, NSCC would remove the defined terms “Commitment”
|
||
and “Credit Facility,” which were used in the current Rule 4(A) to refer to NSCC’s Line of
|
||
Credit, and would remove “Other Qualifying Liquid Resources,” which was used to refer to
|
||
NSCC’s liquid resources other than the Clearing Fund and the Line of Credit. This proposed
|
||
change would simplify Rule 4(A) and would account for NSCC’s continuing efforts to expand
|
||
and diversify its default liquidity resources. The proposed change would also clarify that
|
||
Qualifying Liquid Resources would not include SLD for purposes of the calculations in Rule
|
||
4(A).
|
||
Fourth, the proposed changes would move certain calculations out of the defined terms in
|
||
Section 2 and include them in the relevant later sections of Rule 4(A). This proposed change
|
||
would simplify and clarify Rule 4(A), which currently requires a reader to refer back to the
|
||
defined terms in Section 2 when reading the calculations and requirements set forth in later
|
||
sections of Rule 4(A). For example, Section 2 of Rule 4(A) currently includes the calculation of
|
||
“Special Activity Peak Liquidity Exposure” and “Special Activity Peak Liquidity Need.” In the
|
||
proposed Rule 4(A), NSCC would no longer use the calculation of Special Activity Peak
|
||
Liquidity Exposure in determining the Supplemental Liquidity Providers or in calculating those
|
||
requirements. The calculation of Peak Liquidity Need, which would replace Special Activity
|
||
Peak Liquidity Need, would be moved out of Section 2 and into Section 3, where that calculation
|
||
would be described as being used to identify Supplemental Liquidity Providers.
|
||
Finally, the proposed changes to Section 2 of Rule 4(A) would remove defined terms that
|
||
are no longer needed when NSCC calculates SLD requirements daily. For example, NSCC
|
||
would remove defined terms that are related to the Options Expiration Activity Period, including
|
||
“Special Activity Business Day,” which is currently defined as a Business Day included in an
|
||
Options Expiration Activity Period. NSCC would also remove the defined term for “Special
|
||
Activity Prefund Deposit” because it would no longer be necessary for Members to prefund their
|
||
potential SLD requirement in advance of NSCC’s calculations when they are done on a daily
|
||
basis.
|
||
Section 3 (Supplemental Liquidity Providers). NSCC is proposing to amend Section 3 to
|
||
describe how NSCC would identify the Supplemental Liquidity Providers for each Business
|
||
33 See 17 CFR 240.15c6-1.
|
||
Page 15 of 79
|
||
Day. Section 3 of the proposed Rule 4(A) would state that, each Business Day, NSCC would
|
||
determine the Peak Liquidity Need of each Member during the Lookback Period, and would
|
||
identify the Supplemental Liquidity Providers for that Business Day as the 30 (or fewer)
|
||
Members with the largest Peak Liquidity Need in that time period. These changes would
|
||
implement the proposal described in greater detail above to make this calculation daily and to
|
||
simplify the calculation used to identify Supplemental Liquidity Providers by using Peak
|
||
Liquidity Need rather than using the largest exposures of all providers in the Lookback Period.
|
||
Section 4 (Supplemental Liquidity Obligations); Section 5 (Satisfaction of Supplemental
|
||
Liquidity Obligations); and Section 6 (Notice of Supplemental Liquidity Obligations and
|
||
Payment of Supplemental Liquidity Deposits). NSCC would amend Sections 4, 5 and 6 of Rule
|
||
4(A) to describe the simplified calculation of Supplemental Liquidity Obligations, and the
|
||
process by which Supplemental Liquidity Providers would pay their Supplemental Liquidity
|
||
Obligations after being notified by NSCC. Proposed changes to Section 4 would implement the
|
||
revised calculation of Supplemental Liquidity Obligations, described in greater detail above, as
|
||
the difference between a Supplemental Liquidity Provider’s Daily Liquidity Need for that
|
||
Business Day and the Qualifying Liquid Resources available to NSCC on that day. The
|
||
proposed changes would also create a subsection b. of Section 4 to describe the optional,
|
||
alternative pro rata calculation of Supplemental Liquidity Obligations, as described in greater
|
||
detail above.
|
||
Proposed changes to Sections 5 and 6 of Rule 4(A) would update the defined terms and
|
||
the timing by when Supplemental Liquidity Providers must fund their Supplemental Liquidity
|
||
Obligations to reflect the change of these obligations to daily. Proposed changes to Section 6 of
|
||
Rule 4(A) would state that the notice provided to Supplemental Liquidity Providers regarding
|
||
their Supplemental Liquidity Obligations would state if that amount was calculated pursuant to
|
||
Section 4b as a pro rata share of the largest Supplemental Liquidity Obligation of that Business
|
||
Day.
|
||
Section 7 (Determination of Intraday Supplemental Liquidity Calls) and Section 8
|
||
(Satisfaction of Intraday Supplemental Liquidity Calls). NSCC would amend Sections 7 and 8 of
|
||
Rule 4(A) to reflect the removal of the Special Activity Liquidity Calls and the adoption of the
|
||
two Intraday Supplemental Liquidity Calls, as described in greater detail above. The proposed
|
||
changes to these sections would also update defined terms, as appropriate.
|
||
Returns of Supplemental Liquidity Deposits – Section 9 (Deposits Made in Satisfaction of
|
||
a Supplemental Liquidity Obligation) and Section 10 (Ceasing to be a Participant). NSCC is
|
||
proposing to consolidate the current Sections 9 and 10 of Rule 4(A) into a new Section 9 of Rule
|
||
4(A), which would address the return of SLD that are made in satisfaction of both Supplemental
|
||
Liquidity Obligations and Intraday Supplemental Liquidity Calls. The proposed changes would
|
||
provide that SLD made pursuant to either Supplemental Liquidity Obligations and Intraday
|
||
Supplemental Liquidity Calls would be returned to Supplemental Liquidity Providers on the next
|
||
Business Day after the calculation date, unless otherwise notified by NSCC.
|
||
NSCC would amend Section 10 (currently Section 11) to align the treatment of SLD of a
|
||
retired Member with the treatment of such firm’s Required Fund Deposits, as described in
|
||
greater detail above.
|
||
Page 16 of 79
|
||
Miscellaneous Matters – Section 11 (Obligations of Affiliated Families and Supplemental
|
||
Liquidity Providers), Section 12 (Application of Supplemental Liquidity Deposits) and Section 13
|
||
(Information). NSCC would amend Sections 11, 12 and 13 (currently Sections 12, 13 and 14) of
|
||
Rule 4(A) to update and simplify these provisions. The proposed amendments would not
|
||
substantially amend the purpose or application of these sections.
|
||
Section 11 (currently Section 12) of Rule 4(A) provides that the Supplemental Liquidity
|
||
Obligations of Affiliated Families are the several obligations of all of the Members of the
|
||
Affiliated Family ratably in proportion to their applicable Special Activity Peak Liquidity
|
||
Exposure. NSCC would not change this provision but would update it to use revised defined
|
||
terms. NSCC would also amend Section 11 by consolidating two parallel paragraphs into
|
||
subsection b., which address NSCC’s right to collect SLD from Supplemental Liquidity
|
||
Providers. This proposed change would simplify the provision but would not make substantive
|
||
changes to NSCC’s rights or Members’ obligations.
|
||
Section 12 (currently Section 13), which addresses how SLD are treated under Rule 4,
|
||
would be amended to update defined terms and to clarify that SLD may be held by NSCC as part
|
||
of Members’ actual deposits to the Clearing Fund, pursuant to Section 9 of Rule 4. No
|
||
substantive changes are proposed to this Section.
|
||
Section 13 (currently Section 14) describes NSCC’s obligation to provide Members with
|
||
certain information regarding its SLD calculation. NSCC is proposing to amend this section to
|
||
include updated defined terms and to reflect the daily calculation of SLD.
|
||
(iv) Impact Study Results
|
||
NSCC has provided the Securities and Exchange Commission (“Commission”) with the
|
||
results of an impact study that reviewed the proposal against the observed regulatory liquidity
|
||
needs and NSCC’s Qualifying Liquid Resources available during the period from 2016 through
|
||
2020 to assess both pro-forma and hypothetical impacts of the proposal under various liquidity
|
||
scenarios.
|
||
Pro-Forma Impact Study. The pro-forma impact study compared NSCC’s regulatory
|
||
liquidity needs against the Qualifying Liquid Resources that were available between 2016 and
|
||
2020. The pro-forma analysis indicated that NSCC would expect between 1 and 3 Supplemental
|
||
Liquidity Obligations per year, ranging in size between $1.0 billion to $5.4 billion in 2016
|
||
through 2019. In calendar year 2020, the impact study shows that available Qualifying Liquid
|
||
Resources for each date would have eliminated potential Supplement Liquidity Obligations.
|
||
Additionally, this impact study showed between 4 and 27 actual Supplemental Liquidity
|
||
Obligations were received by NSCC per year, typically averaging $3.6 billion during this same
|
||
period, including 9 actual Supplemental Liquidity Obligations received by NSCC in 2020.
|
||
Hypothetical Impact Study. NSCC also developed several hypothetical liquidity
|
||
scenarios to assess the proposal’s impact. When hypothetical Qualifying Liquid Resources
|
||
available to NSCC are between $17 billion and $22 billion, NSCC would expect between 7 and
|
||
36 Supplemental Liquidity Obligations per year, ranging in size between $2.1 billion to $4.6
|
||
billion each; and (2) when the hypothetical Qualifying Liquid Resources available to NSCC are
|
||
Page 17 of 79
|
||
$22 billion or above, NSCC would expect between 1 and 5 Supplemental Liquidity Obligations
|
||
per year, ranging in size between $2.1 billion to $6.8 billion each.
|
||
NSCC has also provided the Commission with details of potential impacts of the proposal
|
||
on the largest 50 Affiliated Families, a list of the 30 Affiliated Families with the largest liquidity
|
||
exposures as of December 31, 2020, and the respective Affiliated Families’ maximum and
|
||
average NSCC liquidity needs for each calendar year between 2016 and 2020.
|
||
(v) Implementation Timeframe
|
||
NSCC would implement the proposed changes no later than 10 Business Days after the
|
||
later of the approval of the proposed rule change and no objection to the related advance notice34
|
||
by the Commission. NSCC would announce the effective date of the proposed changes by
|
||
Important Notice posted to its website.
|
||
(b) Statutory Basis
|
||
NSCC believes the proposed changes are consistent with the requirements of the Act and
|
||
the rules and regulations thereunder applicable to a registered clearing agency. In particular,
|
||
NSCC believes the proposed changes are consistent with Section 17A(b)(3)(F) of the Act,35 and
|
||
Rules 17Ad-22(e)(7)(i) and (ii), each promulgated under the Act,36 for the reasons described
|
||
below.
|
||
Section 17A(b)(3)(F) of the Act requires that the rules of NSCC be designed to, among
|
||
other things, assure the safeguarding of securities and funds which are in the custody or control
|
||
of the clearing agency or for which it is responsible.37 NSCC believes the proposed rule change
|
||
is designed to assure the safeguarding of securities and funds which are in its custody or control
|
||
or for which it is responsible because the proposal would allow NSCC to better limit its liquidity
|
||
exposure to Members in the event of a Member default.
|
||
Specifically, under the proposal, each Business Day NSCC would measure the
|
||
Supplemental Liquidity Obligation of each Supplemental Liquidity Provider as the difference
|
||
between the Daily Liquidity Need of the Supplemental Liquidity Provider calculated for that
|
||
Business Day and the Qualifying Liquid Resources available to NSCC on that day assuming
|
||
34 NSCC filed this proposed rule change as an advance notice (File No. SR-NSCC2021-801) with the Commission pursuant to Section 806(e)(1) of Title VIII of the DoddFrank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing,
|
||
and Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b-4(n)(1)(i)
|
||
under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of the advance notice is available at
|
||
http://www.dtcc.com/legal/sec-rule-filings.aspx.
|
||
35 15 U.S.C. 78q-1(b)(3)(F).
|
||
36 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
|
||
37 15 U.S.C. 78q-1(b)(3)(F).
|
||
Page 18 of 79
|
||
stressed market conditions. By making these calculations daily based on Members’ current
|
||
activity and NSCC’s resources currently available to NSCC, the proposed SLD requirement
|
||
would provide NSCC with a more accurate measure of its potential liquidity exposures to its
|
||
Members in the event of a Member default. The proposal would also establish a monthly
|
||
intraday SLD collection in connection with options expiration activity that present heighted
|
||
liquidity exposures, and an optional intraday SLD that NSCC may collect when it deems
|
||
appropriate to mitigate any increased liquidity exposures or in light of other circumstances.
|
||
These proposed intraday SLD would allow NSCC to re-calculate its liquidity exposures and
|
||
collect sufficient liquidity to allow it to complete end-of-day settlement in the event of the
|
||
default of a Member.
|
||
Additionally, by providing an alternative pro rata calculation of Supplemental Liquidity
|
||
Obligations in certain circumstances, the proposal would provide NSCC with the flexibility to
|
||
determine the total amount collected on a Business Day, while continuing to collect and hold
|
||
sufficient liquidity to allow NSCC to complete end-of-day settlement in the event of the default
|
||
of the Member with the largest payment obligations. In this way, the proposed change to
|
||
calculate and collect, when applicable, SLD on a daily basis based on current information, and
|
||
on an intraday basis when NSCC observes an increase in its Daily Liquidity Need, would help
|
||
NSCC assure the safeguarding of securities and funds which are in its custody or control or for
|
||
which it is responsible, consistent with the requirements of Section 17A(b)(3)(F) of the Act.38
|
||
The proposed changes to simplify and clarify Rule 4(A), which describes the SLD
|
||
requirement, would also be consistent with the requirements of Section 17A(b)(3)(F) of the
|
||
Act.39 These proposed changes would make the rights and obligations of both NSCC and its
|
||
Members under Rule 4(A) more transparent and easier to understand. A clearer rule supports the
|
||
ability of Members to meet their obligations to provide NSCC with SLD when required. The
|
||
liquidity provided to NSCC through the SLD allows it to complete end-of-day settlement in the
|
||
event of the default of a Member. Therefore, by making the provisions of Rule 4(A) clearer,
|
||
simpler and more transparent to Members, these proposed changes also support NSCC’s
|
||
compliance with the requirements of Section 17A(b)(3)(F) of the Act to assure the safeguarding
|
||
of securities and funds which are in NSCC’s custody or control or for which it is responsible.40
|
||
Rule 17Ad-22(e)(7)(i) under the Act requires that NSCC establish, implement, maintain
|
||
and enforce written policies and procedures reasonably designed to maintain sufficient liquid
|
||
resources at the minimum in all relevant currencies to effect same-day and, where appropriate,
|
||
intraday and multiday settlement of payment obligations with a high degree of confidence under
|
||
a wide range of foreseeable stress scenarios that includes, but is not limited to, the default of the
|
||
participant family that would generate the largest aggregate payment obligation for NSCC in
|
||
extreme but plausible market conditions.41 Rule 17Ad-22(e)(7)(ii) under the Act requires that
|
||
38 Id.
|
||
39 Id.
|
||
40 Id.
|
||
41 17 CFR 240.17Ad-22(e)(7)(i).
|
||
Page 19 of 79
|
||
NSCC establish, implement, maintain and enforce written policies and procedures reasonably
|
||
designed to hold qualifying liquid resources sufficient to meet the minimum liquidity resource
|
||
requirement under Rule 17Ad-22(e)(7)(i) in each relevant currency for which NSCC has
|
||
payment obligations owed to its Members.42
|
||
As described above, the proposal would strengthen NSCC’s ability to maintain sufficient
|
||
liquidity to complete end-of-day settlement in the event of the default of a Member. The
|
||
proposal would do this by allowing NSCC to calculate and collect, when applicable, SLD every
|
||
Business Day from those Members that pose the largest liquidity exposures to NSCC on that day.
|
||
The proposal would also include a mechanism to allow NSCC to collect SLD on an intraday
|
||
basis, including on the first Business Day of the Options Expiration Activity Period, when
|
||
liquidity exposures are historically higher. These resources would be available to NSCC to
|
||
complete end-of-day settlement in the event of the default of a Member. Further, SLD are
|
||
currently, and would continue to be, held by NSCC at either its cash deposit account at the
|
||
Federal Reserve Bank of New York, at a creditworthy commercial bank, or in other investments
|
||
pursuant to the Clearing Agency Investment Policy.43 Therefore, SLD would continue to be
|
||
considered a qualifying liquid resource, as defined by Rule 17Ad-22(a)(14) under the Act,44 and
|
||
would support NSCC’s ability to hold qualifying liquid resources sufficient to meet the
|
||
minimum liquidity resource requirement under Rule 17Ad-22(e)(7)(i), as required by Rule
|
||
17Ad-22(e)(7)(ii). Additionally, the proposed alternative pro rata calculation of Supplemental
|
||
Liquidity Obligations would provide NSCC with the flexibility to determine the total amount
|
||
collected on a Business Day, while continuing to collect and hold sufficient liquidity to allow
|
||
NSCC to complete end-of-day settlement in the event of the default of the Member with the
|
||
largest payment obligations, as required by Rule 17Ad-22(e)(7)(i).45 As such, this proposed
|
||
change would support NSCC’s ability to hold sufficient qualifying liquid resources to meet its
|
||
minimum liquidity resource requirement under Rules 17Ad-22(e)(7)(i) and (ii).46
|
||
4. Self-Regulatory Organization’s Statement on Burden on Competition
|
||
NSCC believes that the proposed rule change could have an impact on competition.
|
||
Specifically, NSCC believes the proposed changes could burden competition because they would
|
||
require those Members that are identified as Supplemental Liquidity Providers to make an SLD
|
||
42 17 CFR 240.17Ad-22(e)(7)(ii). For purposes of Rule 17Ad-22(e)(7)(ii), “qualifying
|
||
liquid resources” are defined in Rule 17Ad-22(a)(14) as including, in part, cash held
|
||
either at the central bank of issue or at creditworthy commercial banks. Supra note 4.
|
||
43 See Securities Exchange Act Release Nos. 79528 (December 12, 2016), 81 FR 91232
|
||
(December 16, 2016) (File Nos. SR-DTC-2016-007, SR-FICC-2016-005, SR-NSCC2016-003); 84949 (December 21, 2018), 83 FR 67779 (December 31, 2018) (File Nos.
|
||
SR-DTC-2018-012, SR-FICC-2018-014, SR-NSCC-2018-013).
|
||
44 17 CFR 240.17Ad-22(a)(14).
|
||
45 17 CFR 240.17Ad-22(e)(7)(i).
|
||
46 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
|
||
Page 20 of 79
|
||
to the Clearing Fund each Business Day, when applicable, rather than only monthly in
|
||
connection with the expiration of stock options.
|
||
Members are currently subject to SLD requirements under Rule 4(A), and, while the
|
||
proposed rule change could result in a Supplemental Liquidity Obligation on a more frequent
|
||
basis, the impact study results, discussed above, show that the proposal would not have a
|
||
significant impact on the frequency or amount of those requirements. The Supplemental
|
||
Liquidity Obligations of Supplemental Liquidity Providers would be in direct relation to the
|
||
specific liquidity exposures presented to NSCC by Members’ daily activity. Therefore,
|
||
Members that present the largest liquidity exposures to NSCC, regardless of the type of Member,
|
||
currently have, and would continue to have, similar SLD requirements. The proposed alternative
|
||
calculation of Supplemental Liquidity Obligations would provide NSCC with the flexibility to
|
||
collect and hold sufficient liquidity to meet NSCC’s regulatory obligations while allocating the
|
||
Supplemental Liquidity Obligations on a pro rata basis among the Supplemental Liquidity
|
||
Providers for that Business Day. This proposed change would treat each Supplemental Liquidity
|
||
Provider equally when this alternative calculation is triggered.
|
||
Therefore, NSCC believes that any burden on competition imposed by the proposed
|
||
changes would not be significant and, further, would be both necessary and appropriate in
|
||
furtherance of NSCC’s efforts to mitigate risks and meet the requirements of the Act,47 as
|
||
described in this filing and further below.
|
||
NSCC believes the above described burden on competition that may be created by the
|
||
proposed changes to the SLD requirement would be necessary in furtherance of the purposes of
|
||
the Act, specifically Section 17A(b)(3)(F) of the Act.48 As discussed above, the proposed
|
||
change would improve NSCC’s ability to estimate its liquidity exposures in the calculation and
|
||
collection of SLD by using daily activity rather than estimating potential exposures based on
|
||
activity in a look-back period. The proposal would also establish a monthly intraday SLD to
|
||
address the additional liquidity exposures that are presented by monthly options expiration
|
||
activity, and an optional intraday SLD that may be collected when NSCC deems appropriate. In
|
||
aggregate, the total SLD collected would improve NSCC’s liquidity risk management by
|
||
supplementing its liquidity resources that are available to it to complete end-of-day settlement in
|
||
the event of the default of a Member. The proposed pro rata alternative calculation of SLD
|
||
would allow NSCC to opt to collect only the largest Supplemental Liquidity Obligation
|
||
calculated for that Business Day, while still meeting NSCC’s applicable regulatory obligations.
|
||
The proposed enhancements to its liquidity risk management would help NSCC assure the
|
||
safeguarding of securities and funds which are in its custody or control or for which it is
|
||
responsible, consistent with the requirements of Section 17A(b)(3)(F) of the Act.49
|
||
NSCC believes the proposed changes would also support its compliance with Rules
|
||
17Ad-22(e)(7)(i) and (ii) under the Act, which require NSCC to establish, implement, maintain
|
||
47 15 U.S.C. 78q-1(b)(3)(I).
|
||
48 15 U.S.C. 78q-1(b)(3)(F).
|
||
49 Id.
|
||
Page 21 of 79
|
||
and enforce written policies and procedures reasonably designed to (x) maintain sufficient liquid
|
||
resources at the minimum in all relevant currencies to effect same-day and, where appropriate,
|
||
intraday and multiday settlement of payment obligations with a high degree of confidence under
|
||
a wide range of foreseeable stress scenarios that includes, but is not limited to, the default of the
|
||
participant family that would generate the largest aggregate payment obligation for NSCC in
|
||
extreme but plausible market conditions,50 and (y) hold qualifying liquid resources sufficient to
|
||
meet the minimum liquidity resource requirement under Rule 17Ad-22(e)(7)(i) in each relevant
|
||
currency for which NSCC has payment obligations owed to its Members.51
|
||
The proposal would strengthen NSCC’s ability to maintain sufficient liquidity to
|
||
complete end-of-day settlement in the event of the default of a Member by allowing NSCC to
|
||
collect SLD each Business Day from those Members that pose the largest liquidity exposures to
|
||
NSCC on that day. Further, SLD are currently, and would continue to be, cash deposits to
|
||
NSCC’s Clearing Fund, which meet the criteria to be considered qualifying liquid resources, as
|
||
defined by Rule 17Ad-22(a)(14) under the Act.52 The proposed alternative pro rata calculation
|
||
would allow NSCC to continue to collect sufficient liquidity to meet the requirements of Rule
|
||
17Ad-22(e)(7)(i).53 As such, this proposed change would support NSCC’s ability to hold
|
||
sufficient qualifying liquid resources to meet its minimum liquidity resource requirement under
|
||
Rules 17Ad-22(e)(7)(i) and (ii).54
|
||
NSCC believes that the above described burden on competition that could be created by
|
||
the proposed changes would be appropriate in furtherance of the purposes of the Act because
|
||
such changes have been designed to assure the safeguarding of securities and funds which are in
|
||
the custody or control of NSCC or for which it is responsible, as described in detail above.
|
||
Under both the current Rule 4(A) and the proposed changes to Rule 4(A), the SLD requirements
|
||
are designed to require those Members whose settlement activity pose the largest liquidity
|
||
exposures to NSCC to provide SLD in the amount of such exposures. The proposed changes to
|
||
Rule 4(A) would better support NSCC by allowing it to calculate and collect, when applicable,
|
||
SLD to address liquidity exposures that are presented by the activity of Supplemental Liquidity
|
||
Providers each Business Day rather than only during monthly options expiration periods. The
|
||
proposed rule change would improve NSCC’s ability to measure these liquidity exposures by
|
||
using daily activity rather than estimations based on past activity.
|
||
Therefore, because the proposed changes are designed to provide NSCC with a more
|
||
accurate measure of the liquidity risks presented by Members’ daily activity, NSCC believes the
|
||
proposal would meet NSCC’s risk management goals and its regulatory obligations. NSCC
|
||
believes that it has designed the proposed rule change in an appropriate way in order to comply
|
||
50 17 CFR 240.17Ad-22(e)(7)(i).
|
||
51 17 CFR 240.17Ad-22(e)(7)(ii).
|
||
52 17 CFR 240.17Ad-22(a)(14).
|
||
53 17 CFR 240.17Ad-22(e)(7)(i).
|
||
54 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
|
||
Page 22 of 79
|
||
with NSCC’s obligations under the Act. Therefore, as described above, NSCC believes the
|
||
proposed changes are necessary and appropriate in furtherance of NSCC’s obligations under the
|
||
Act,55 specifically Section 17A(b)(3)(F) of the Act56 and Rules 17Ad-22(e)(7)(i) and (ii) under
|
||
the Act.57
|
||
5. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule
|
||
Change Received from Members, Participants, or Others
|
||
NSCC has not received or solicited any written comments relating to this proposal.
|
||
NSCC will notify the Commission of any written comments received by NSCC.
|
||
6. Extension of Time Period for Commission Action
|
||
NSCC does not consent to an extension of the time period specified in Section 19(b)(2)
|
||
of the Act58 for Commission action.
|
||
7. Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated
|
||
Effectiveness Pursuant to Section 19(b)(2)
|
||
(a) Not applicable.
|
||
(b) Not applicable.
|
||
(c) Not applicable.
|
||
(d) Not applicable.
|
||
8. Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or
|
||
of the Commission
|
||
Not applicable.
|
||
9. Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
|
||
Not applicable.
|
||
55 15 U.S.C. 78q-1(b)(3)(I).
|
||
56 15 U.S.C. 78q-1(b)(3)(F).
|
||
57 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
|
||
58 15 U.S.C. 78s(b)(2).
|
||
Page 23 of 79
|
||
10. Advance Notice Filed Pursuant to Section 806(e) of the Payment, Clearing, and
|
||
Settlement Supervision Act of 2010
|
||
Not applicable.
|
||
11. Exhibits
|
||
Exhibit 1 – Not applicable.
|
||
Exhibit 1A – Notice of proposed rule change for publication in the Federal Register.
|
||
Exhibit 2 – Not applicable.
|
||
Exhibit 3 – Impact Study Data – January 2016 to December 2020. Omitted and filed
|
||
separately with the Commission. Confidential treatment of this Exhibit 3 pursuant to 17 CFR
|
||
240.24b-2 being requested.
|
||
Exhibit 4 – Not applicable.
|
||
Exhibit 5 – Proposed changes to the Rules.
|
||
Page 24 of 79
|
||
EXHIBIT 1A
|
||
SECURITIES AND EXCHANGE COMMISSION
|
||
(Release No. 34-[_________]; File No. SR-NSCC-2021-002)
|
||
[DATE]
|
||
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of
|
||
Filing of Proposed Rule Change to Amend the Supplemental Liquidity Deposit
|
||
Requirements
|
||
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)1
|
||
and
|
||
Rule 19b-4 thereunder,2
|
||
notice is hereby given that on March __, 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.3
|
||
The Commission is
|
||
publishing this notice to solicit comments on the proposed rule change from interested
|
||
persons.
|
||
I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule
|
||
Change
|
||
The proposed rule change consists of modifications to Rule 4(A) (Supplemental
|
||
Liquidity Deposits) of the NSCC’s Rules & Procedures (“Rules”) to (1) calculate and
|
||
collect, when applicable, supplemental liquidity deposits to NSCC’s Clearing Fund
|
||
1
|
||
15 U.S.C. 78s(b)(1).
|
||
2
|
||
17 CFR 240.19b-4.
|
||
3
|
||
NSCC filed this proposed rule change as an advance notice (File No. SR-NSCC2021-801) with the Commission pursuant to Section 806(e)(1) of Title VIII of the
|
||
Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the
|
||
Payment, Clearing, and Settlement Supervision Act of 2010, 12 U.S.C.
|
||
5465(e)(1), and Rule 19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A
|
||
copy of the advance notice is available at http://www.dtcc.com/legal/sec-rulefilings.aspx.
|
||
Page 25 of 79
|
||
(“Supplemental Liquidity Deposits,” or “SLD”) on a daily basis rather than only in
|
||
advance of the monthly expiration of stock options (defined in Rule 4(A) as “Options
|
||
Expiration Activity Period”); (2) establish an intraday SLD obligation that would apply in
|
||
advance of Options Expiration Activity Periods and may also be applied on other days, as
|
||
needed; (3) implement an alternative pro rata calculation of Members’ SLD obligations
|
||
that may apply in certain circumstances; and (4) simplify and improve the transparency
|
||
of the description of the calculation, collection and treatment of SLD in Rule 4(A) of the
|
||
Rules, as described in greater detail below.4
|
||
|
||
II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the
|
||
Proposed Rule Change
|
||
In its filing with the Commission, the clearing agency included statements
|
||
concerning the purpose of and basis for the proposed rule change and discussed any
|
||
comments it received on the proposed rule change. The text of these statements may be
|
||
examined at the places specified in Item IV below. The clearing agency has prepared
|
||
summaries, set forth in sections A, B, and C below, of the most significant aspects of
|
||
such statements.
|
||
(A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for,
|
||
the Proposed Rule Change
|
||
1. Purpose
|
||
NSCC is proposing to enhance its management of the liquidity risks that arise in
|
||
or are borne by it by calculating and collecting, when applicable, SLD on each Business
|
||
Day rather than only in advance of Options Expiration Activity Periods. The proposed
|
||
4
|
||
Capitalized terms not defined herein are defined in the Rules, available at
|
||
http://dtcc.com/~/media/Files/Downloads/legal/rules/nscc_rules.pdf.
|
||
Page 26 of 79
|
||
changes would establish an intraday SLD obligation that would apply in advance of
|
||
Options Expiration Activity Periods and may be applicable on any Business Day, as
|
||
needed. The proposal would also implement an alternative pro rata calculation of
|
||
Members’ SLD obligations that may apply in certain circumstances. Finally, in
|
||
connection with these proposed changes, NSCC would simplify and improve the
|
||
description of the calculation, collection and treatment of SLD in Rule 4(A). These
|
||
proposed rule changes are described in greater detail below.
|
||
(i) Overview of the NSCC Liquidity Risk Management
|
||
NSCC, along with its affiliates, The Depository Trust Company and Fixed
|
||
Income Clearing Corporation, maintains a Clearing Agency Liquidity Risk Management
|
||
Framework (“Framework”) that sets forth the manner in which NSCC measures,
|
||
monitors and manages the liquidity risks that arise in or are borne by it.5
|
||
As a central
|
||
counterparty, NSCC’s liquidity needs are driven by the requirement to complete end-ofday money settlement, on an ongoing basis, in the event NSCC ceases to act for a
|
||
Member (hereinafter referred to as a “default”).6
|
||
If a Member defaults, NSCC needs to
|
||
complete settlement of guaranteed transactions on the defaulted Member’s behalf from
|
||
the date of default through the remainder of the settlement cycle. As such, and as
|
||
provided for in the Framework, NSCC measures the sufficiency of its qualifying liquid
|
||
5
|
||
See Securities Exchange Act Release No. 82377 (December 21, 2017), 82 FR
|
||
61617 (December 28, 2017) (File Nos. SR-DTC-2017-004; SR-FICC-2017-008;
|
||
SR-NSCC-2017-005).
|
||
6
|
||
The Rules identify when NSCC may cease to act for a Member and the types of
|
||
actions NSCC may take. For example, NSCC may suspend a firm’s membership
|
||
with NSCC or prohibit or limit a Member’s access to NSCC’s services in the
|
||
event that Member defaults on a financial or other obligation to NSCC. See Rule
|
||
46 (Restrictions on Access to Services) of the Rules, supra note 4.
|
||
Page 27 of 79
|
||
resources through daily liquidity studies across a range of scenarios, including amounts
|
||
NSCC would need in the event the Member or Member family with the largest aggregate
|
||
liquidity exposure defaults.7
|
||
|
||
As described in the Framework, NSCC seeks to maintain qualifying liquid
|
||
resources in an amount sufficient to cover this risk. These resources currently include
|
||
(1) cash deposits to the NSCC Clearing Fund;8
|
||
(2) the proceeds of the issuance and
|
||
private placement of (a) short-term, unsecured notes in the form of commercial paper and
|
||
extendable notes (“Commercial Paper Program”),9
|
||
and (b) term debt (“Term Debt
|
||
Issuance”);10 (3) cash that would be obtained by drawing on NSCC’s committed 364-day
|
||
credit facility with a consortium of banks (“Line of Credit”);11 and (4) Supplemental
|
||
Liquidity Deposits, collected pursuant to Rule 4(A), which are currently designed to
|
||
cover the heightened liquidity exposure arising around Options Expiration Activity
|
||
7
|
||
“Qualifying liquid resources” are defined in Rule 17Ad-22(a)(14) under the Act.
|
||
17 CFR 240.17Ad-22(a)(14). The Framework also includes a definition of
|
||
qualifying liquid resources that incorporates by reference Rule 17Ad-22(a)(14).
|
||
See supra note 5.
|
||
8
|
||
See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
|
||
Matters) of the Rules, supra note 4.
|
||
9
|
||
See Securities Exchange Act Release Nos. 75730 (August 19, 2015), 80 FR
|
||
51638 (August 25, 2015) (File No. SR-NSCC-2015-802); 82676 (February 9,
|
||
2018), 83 FR 6912 (February 15, 2018) (File No. SR-NSCC-2017-807).
|
||
10 See Securities Exchange Act Release No. 88146 (February 7, 2020), 85 FR 8046
|
||
(February 12, 2020) (File No. SR-NSCC-2019-802).
|
||
11 See Securities Exchange Act Release No. 80605 (May 5, 2017), 82 FR 21850
|
||
(May 10, 2017) (File Nos. SR-DTC-2017-802; SR-NSCC-2017-802).
|
||
Page 28 of 79
|
||
Periods, required from those Members whose activity would pose the largest liquidity
|
||
exposure to NSCC.12
|
||
NSCC’s liquidity risk management has evolved in order to adhere to regulatory
|
||
requirements that were adopted after Rule 4(A) was implemented.13 As part of its efforts
|
||
to maintain compliance with these requirements, NSCC has continued to strengthen its
|
||
liquidity risk management strategy, including through growing and diversifying its
|
||
qualifying liquid resources. In connection with these ongoing efforts, NSCC is proposing
|
||
to calculate and collect, when applicable, SLD every Business Day rather than only in
|
||
connection with Options Expiration Activity Periods. This proposed change would
|
||
improve NSCC’s ability to measure and monitor its daily liquidity exposures and allow it
|
||
to collect additional qualifying liquid resources from Members whose activity poses the
|
||
largest liquidity exposure to NSCC in connection with their daily settlement activity, and
|
||
not only during Options Expiration Activity Periods. By measuring SLD against
|
||
Members’ actual daily settlement activity and NSCC’s available qualifying liquid
|
||
resources, the proposal would also help mitigate risks to NSCC that it is unable to secure
|
||
adequate default liquidity from other sources in an amount necessary to meet its liquidity
|
||
needs. For example, the proposal would help mitigate the risks that could arise if
|
||
investor demand for the short-term notes issued under the Commercial Paper Program
|
||
12 See Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, supra note 4. See
|
||
also Securities Exchange Act Release Nos. 70999 (December 5, 2013), 78 FR
|
||
75413 (December 11, 2013) (File No. SR-NSCC-2013-02); 71000 (December 5,
|
||
2013), 78 FR 75400 (December 11, 2013) (File No. SR-NSCC-2013-802).
|
||
13 See 17 CFR 240.17Ad-22(e)(7). See also supra note 5.
|
||
Page 29 of 79
|
||
weakens, there is limited investor demand for term debt issued pursuant to a Term Debt
|
||
Issuance, or NSCC is unable to renew its Line of Credit at the targeted amount.
|
||
NSCC is also proposing to establish an intraday SLD obligation that would apply
|
||
on the first Business Day of the Options Expiration Activity Period to allow NSCC to
|
||
continue to mitigate the additional liquidity exposures presented by options activity. The
|
||
proposal would also permit NSCC to calculate and collect an intraday SLD on any
|
||
Business Day when, for example, NSCC believes that it is necessary to collect an
|
||
additional SLD from a Member whose activity presents relatively greater risks to the
|
||
NSCC on an overnight basis.
|
||
NSCC is also proposing to implement an alternative calculation of Members’
|
||
SLD requirements that would be their pro rata allocation of the largest SLD obligation
|
||
calculated for that Business Day. This proposed change would provide NSCC with the
|
||
discretion, in certain circumstances, to allocate its largest liquidity need on a Business
|
||
Day among those Members that are required to pay SLD on that day rather than collect
|
||
separate SLD from those Members, as described in greater detail below.
|
||
In connection with these proposed changes, NSCC would also simplify the
|
||
description of the calculation of SLD in Rule 4(A) in order to improve the transparency
|
||
of this Rule, as described in greater detail below.
|
||
(ii) Current Rule 4(A) and Supplemental Liquidity Deposits
|
||
Under the current Rule 4(A), NSCC collects SLD from the unaffiliated Members
|
||
and families of affiliated Members (each defined as an “Affiliated Family”) that incur the
|
||
Page 30 of 79
|
||
largest gross settlement debits over the settlement cycle during times of increased trading
|
||
activity that arise around Options Expiration Activity Periods.14
|
||
Under the current Rule 4(A), NSCC performs calculations on a monthly basis, no
|
||
later than the fifth day prior to an Options Expiration Activity Period, using activity
|
||
observed over a 24-month lookback period (defined in the current Rule 4(A) as the
|
||
“Special Activity Lookback Period”).15 These calculations determine (1) NSCC’s largest
|
||
liquidity need that exceeded its liquidity resources (defined in Rule 4(A) as “Special
|
||
Activity Peak Liquidity Need”); and (2) the 30 (or fewer) unaffiliated Members or
|
||
Affiliated Families (defined in Rule 4(A) as “Special Activity Liquidity Providers”) that
|
||
presented the largest liquidity exposures to NSCC (defined in Rule 4(A) as “Special
|
||
Activity Peak Liquidity Exposures”).16 To determine the SLD obligations of each
|
||
Special Activity Liquidity Provider, the calculated Special Activity Peak Liquidity Need
|
||
of NSCC is allocated to these Special Activity Liquidity Providers in proportion to the
|
||
Special Activity Peak Liquidity Exposures they presented to NSCC during the Special
|
||
Activity Lookback Period. Special Activity Liquidity Providers are required to fund their
|
||
SLD obligations by the close of business on the second day prior to the applicable
|
||
Options Expiration Activity Period.17 SLD may be returned to Special Activity Liquidity
|
||
14 See Section 2 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, supra
|
||
note 4.
|
||
15 See id.
|
||
16 See Section 3 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
17 See Section 4 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
Page 31 of 79
|
||
Providers seven Business Days after the end of the applicable Options Expiration
|
||
Activity Period.18
|
||
On any Business Day between calculation dates, if NSCC observes an increase in
|
||
its liquidity needs that exceeds a predetermined threshold amount, it may call for an
|
||
additional deposit from the Member whose increase in activity levels caused (or was the
|
||
primary cause of) such increased liquidity need (defined in Rule 4(A) as “Special
|
||
Activity Liquidity Call”).19 NSCC may hold deposits made pursuant to a Special
|
||
Activity Liquidity Call for up to 90 days after the deposit is made.20 Members are also
|
||
permitted to submit a cash deposit to the Clearing Fund as a “Special Activity Prefund
|
||
Deposit” no later than the first Business Day of an Options Expiration Activity Period.21
|
||
NSCC understands that a Member would generally make a Special Activity Prefund
|
||
Deposit when it anticipates that its Special Activity Peak Liquidity Exposure during that
|
||
period may be greater than the amount calculated by NSCC pursuant to Rule 4(A) based
|
||
on activity in the Special Activity Lookback Period.22
|
||
The current Rule 4(A) also addresses how SLD are treated generally.23
|
||
Specifically, while SLD are part of a Member’s actual deposit to the Clearing Fund, they
|
||
18 See Section 9 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
19 See Section 7 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
20 See Section 10 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
21 See definition of “Special Activity Prefund Deposit” in Section 2 of Rule 4(A)
|
||
(Supplemental Liquidity Deposits) of the Rules, id.
|
||
22 See id.
|
||
23 See Section 13 of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules, id.
|
||
Page 32 of 79
|
||
are made in addition to a Member’s Required Fund Deposit and any other deposit of any
|
||
such Member to the Clearing Fund.24 Rule 4(A) also provides that SLD may be invested
|
||
and may be used to satisfy a loss or liability as provided for in Sections 3 or 13 of Rule 4,
|
||
and addresses NSCC’s obligation to provide Members with certain information that
|
||
would help them anticipate their potential SLD requirements.25
|
||
(iii) Amended Rule 4(A) and Proposed Daily Calculation of
|
||
Supplemental Liquidity Deposits
|
||
In order to better address the liquidity risks presented by Members’ daily activity,
|
||
NSCC is proposing to amend Rule 4(A) to calculate and collect, when applicable, SLD
|
||
every Business Day rather than only in connection with the monthly expiration of stock
|
||
options. While the monthly expiration of stock options does present larger liquidity
|
||
exposures to NSCC, NSCC may also face large liquidity exposures from Members’ daily
|
||
activity, particularly during volatile market conditions. By allowing NSCC to calculate
|
||
and collect SLD daily, NSCC would be able to identify these exposures based on
|
||
Members’ daily activity rather than estimate its upcoming liquidity exposures based on
|
||
activity observed over a lookback period. The proposal would help NSCC mitigate its
|
||
liquidity risks through the daily collection of SLD from those Members’ whose daily
|
||
activity would, in the event of the Member’s default, create a potential liquidity need that
|
||
is in excess of NSCC’s available qualifying liquid resources. The proposal would also
|
||
permit NSCC to return SLD to Members on the Business Day following the day those
|
||
24 See Section 13(b) of Rule 4(A) (Supplemental Liquidity Deposits) of the Rules,
|
||
id.
|
||
25 See Section 13(c) and Section 14 of Rule 4(A) (Supplemental Liquidity Deposits)
|
||
of the Rules, id.
|
||
Page 33 of 79
|
||
deposits are collected and would remove the current requirement that SLD be held for up
|
||
to 90 days.
|
||
In order to implement this proposed change to the timing of the SLD, NSCC
|
||
would make a number of changes to Rule 4(A), described below. The proposed changes
|
||
to Rule 4(A) would implement a daily calculation and collection of SLD, simplify and
|
||
clarify the calculations done in connection with the SLD requirements, and enhance the
|
||
disclosures of the SLD requirements. Despite these proposed changes, the structure of
|
||
Rule 4(A) and the fundamental mechanics of the SLD requirements would be unchanged.
|
||
Proposed Daily Calculation of Supplemental Liquidity Deposits
|
||
Supplemental Liquidity Providers. Under the proposed Rule 4(A), each Business
|
||
Day NSCC would determine the 30 (or fewer) Members (each such Member a
|
||
“Supplemental Liquidity Provider”) that had the “Peak Liquidity Need,” which would be
|
||
defined as the largest Daily Liquidity Need that NSCC would have for that Member or
|
||
Affiliated Family in a “Lookback Period.” 26 For purposes of this calculation, Daily
|
||
Liquidity Need would be defined as the amount of liquid resources needed to effect the
|
||
settlement of NSCC’s payment obligations as a central counterparty over a three day
|
||
settlement cycle, assuming the default of that Member on that day.
|
||
As described above, Supplemental Liquidity Providers are currently identified by
|
||
reviewing Members’ Special Activity Peak Liquidity Exposures over the Lookback
|
||
26 The “Lookback Period” would continue to be defined as 24 months, or a longer
|
||
period as determined by NSCC in its discretion. NSCC may adjust the Lookback
|
||
Period if, for example, unusual activity observed in the Lookback Period is not an
|
||
appropriate indicator of future settlement activity and causes a Member to be a
|
||
Supplemental Liquidity Provider. See Section 2 (Defined Terms) of Rule 4(A),
|
||
id.
|
||
Page 34 of 79
|
||
Period. Under the proposed approach, NSCC would base this determination on
|
||
Members’ Peak Liquidity Need, which would continue to identify those Members whose
|
||
activity posed the largest liquidity risks to NSCC during the Lookback Period. The
|
||
proposed approach would no longer require a calculation using NSCC’s available liquid
|
||
resources on each day in the Lookback Period but would use a simpler approach by
|
||
looking only at liquidity need. The proposed approach to use a simpler calculation would
|
||
reduce the risk of error and would clarify the description of how NSCC would identify
|
||
Supplemental Liquidity Providers in the proposed Rule 4(A), making it more predictable
|
||
to Members.
|
||
Supplemental Liquidity Obligation. After NSCC determines the Supplemental
|
||
Liquidity Providers, NSCC would then determine if any of the Supplemental Liquidity
|
||
Providers would be required to pay an SLD on that Business Day. The proposed Rule
|
||
4(A) would use a simplified calculation by determining if the Daily Liquidity Need for
|
||
each Supplemental Liquidity Provider on that Business Day exceeds the sum of NSCC’s
|
||
qualifying liquid resources available to NSCC on that day, assuming stressed market
|
||
conditions (described below) (defined in the proposed Rule 4(A) as “Qualifying Liquid
|
||
Resources”). The result of that calculation would be a Supplemental Liquidity Provider’s
|
||
SLD requirement (defined in the proposed Rule 4(A) as a “Supplemental Liquidity
|
||
Obligation”) for that day. If the Daily Liquidity Need of a Supplemental Liquidity
|
||
Provider does not exceed NSCC’s Qualifying Liquid Resources on that day, then it would
|
||
not have a Supplemental Liquidity Obligation.
|
||
Because this calculation would be done at the start of each Business Day (as
|
||
discussed further below), it would be based on the Qualifying Liquid Resources,
|
||
Page 35 of 79
|
||
including Required Fund Deposits to the Clearing Fund, available to NSCC as of the end
|
||
of the prior Business Day. Additionally, in order to anticipate market conditions that
|
||
could cause Qualifying Liquid Resources to be unavailable on that day, NSCC would
|
||
apply stress scenarios in determining its total Qualifying Liquid Resources for purposes
|
||
of Rule 4(A). Currently, NSCC applies stress scenarios in determining the Special
|
||
Activity Daily Liquidity Need and, in practice, they are currently applied to the Other
|
||
Qualifying Liquid Resources in this calculation under the current Rule 4(A).27 The
|
||
proposed change would allow NSCC to continue to assume stressed markets in its SLD
|
||
calculations, which protects it against unexpected market events.28 The proposed
|
||
changes to Rule 4(A) would make it clearer how these stress scenarios are applied.
|
||
Under this proposed calculation, NSCC would no longer need to estimate the
|
||
potential liquidity need a Member’s activity could pose to NSCC based on activity that
|
||
settled in the Lookback Period. Instead, the Supplemental Liquidity Obligation of a
|
||
Member would be calculated based on the actual liquidity exposure that its daily activity
|
||
would pose to NSCC on that particular day in the event of that Member’s default. The
|
||
proposed change provides both NSCC and Members with a more reliable measure of the
|
||
27 Current Rule 4(A) uses the defined term “Other Qualifying Liquid Resources” to
|
||
refer to NSCC’s qualifying liquid resources other than the Clearing Fund and the
|
||
Line of Credit. See Section 2 of Rule 4(A) (Supplemental Liquidity Deposits) of
|
||
the Rules, id.
|
||
28 NSCC would apply the same stress scenarios that it currently applies, which
|
||
include the market shocks of 1987, and removing the largest commitment to the
|
||
Line of Credit, excess deposits to the Clearing Fund on deposit and proceeds from
|
||
issued commercial paper that is maturing within five Business Days from NSCC’s
|
||
Qualifying Liquid Resource. Any changes to these stress scenarios would be
|
||
announced by an Important Notice posted to NSCC’s website.
|
||
Page 36 of 79
|
||
liquidity risks posed to NSCC by its Members’ daily settlement activity in calculating
|
||
SLD requirements.
|
||
Each Supplemental Liquidity Provider that has a Supplemental Liquidity
|
||
Obligation on a Business Day would receive a notice from NSCC of the amount of its
|
||
Supplemental Liquidity Obligation and would be required to make a deposit in that
|
||
amount to the Clearing Fund within one hour of such notice. The proposed timing of
|
||
funding a Supplemental Liquidity Obligation would mirror the current requirement that is
|
||
applied to Members’ Required Fund Deposits, which is also calculated and collected
|
||
daily, and must be funded within one hour of demand.29 Specifically, NSCC expects to
|
||
deliver notification of Supplemental Liquidity Obligations to Supplemental Liquidity
|
||
Providers by around 8:30 AM ET each Business Day, with deposits required by no later
|
||
than 9:30 AM ET.
|
||
Proposed Pro Rata Calculation of Supplemental Liquidity Obligations. As an
|
||
alternative to the calculation of Supplemental Liquidity Obligations described above,
|
||
proposed Rule 4(A) would also state that, in the event two or more Supplemental
|
||
Liquidity Providers have a Supplemental Liquidity Obligation of more than $2 billion on
|
||
a Business Day, calculated pursuant to the calculation described above, NSCC may
|
||
determine the Supplemental Liquidity Obligation of all Supplemental Liquidity Providers
|
||
on that day would be their pro rata share of the largest Supplemental Liquidity Obligation
|
||
calculated on that Business Day.30
|
||
29 See Section II(B) of Procedure XV (Clearing Fund Formula and Other Matters) of
|
||
the Rules, supra note 4.
|
||
30 As an example, the Supplemental Liquidity Obligations for three Supplemental
|
||
Liquidity Providers on a Business Day are – Member A: $6 billion, Member B:
|
||
$2 billion and Member C: $1 billion. If NSCC determines, in its sole discretion,
|
||
Page 37 of 79
|
||
This proposed alternative calculation of the Supplemental Liquidity Obligations
|
||
would provide NSCC with the option of collecting only the largest SLD calculated on a
|
||
Business Day, allocated among each of the Supplemental Liquidity Providers. The
|
||
purpose of this proposed provision is to provide NSCC with the option of collecting
|
||
enough funds to meet its regulatory requirements in circumstances when the aggregate
|
||
Supplemental Liquidity Obligations on a particular day would significantly exceed that
|
||
amount. Therefore, NSCC has structured this provision to be available only if two or
|
||
more Supplemental Liquidity Providers owe SLD of more than $2 billion. NSCC has
|
||
never had two more Supplemental Liquidity Providers owe more than $2 billion in SLD
|
||
on a calculation date since Rule 4(A) was adopted. Therefore, NSCC believes this
|
||
alternative calculation would only be available in very limited circumstances.
|
||
Furthermore, NSCC believes the threshold of $2 billion is appropriate as it would only
|
||
permit this alternative calculation in circumstances when it would have a material impact
|
||
on the allocation of Supplemental Liquidity Obligations among the Supplemental
|
||
Liquidity Providers.
|
||
In such circumstances, when multiple Members have relatively large
|
||
Supplemental Liquidity Obligations of more than $2 billion, NSCC would have the
|
||
option to determine if it is appropriate to collect the largest SLD calculated for that
|
||
Business Day, divided pro rata among the Supplemental Liquidity Providers rather than
|
||
to calculate their Supplemental Liquidity Obligations on a pro-rata basis, then
|
||
their Supplemental Liquidity Obligations would be – Member A: $4 billion (or
|
||
6/9 of the largest Supplemental Liquidity Obligation of $6 billion), Member B:
|
||
$1.3 billion (or 2/9 of the $6 billion) and Member C: $700 million (or 1/9 of the
|
||
$6 billion). The notice provided to each Supplemental Liquidity Provider on that
|
||
Business Day would inform those Members that this pro-rata calculation was
|
||
applied.
|
||
Page 38 of 79
|
||
collect the each of the Supplemental Liquidity Obligations of those firms. NSCC may
|
||
determine, for example, that, in certain market conditions, this approach would be
|
||
appropriate to alleviate liquidity pressures on Supplemental Liquidity Providers. This
|
||
alternative calculation would allow NSCC to collect sufficient qualifying liquid resources
|
||
to meet its regulatory obligations with respect to liquidity risk management without
|
||
requiring all of the Supplemental Liquidity Providers to fund the total amount of their
|
||
calculated Supplemental Liquidity Obligation on that Business Day.31
|
||
Intraday Supplemental Liquidity Calls. The proposed Rule 4(A) would also
|
||
establish Intraday Supplemental Liquidity Calls that would replace the current Special
|
||
Activity Liquidity Calls. The existing Special Activity Liquidity Calls are designed to
|
||
address increases in NSCC’s liquidity need between calculation dates. The proposed
|
||
Intraday Supplemental Liquidity Calls would serve a similar function, allowing NSCC to
|
||
calculate and collect additional SLD on an intraday basis if a Supplemental Liquidity
|
||
Provider’s increased activity levels or projected settlement activity causes NSCC’s Daily
|
||
Liquidity Need to exceed NSCC’s Qualifying Liquid Resources. This proposed
|
||
provision would assist NSCC in mitigating increased liquidity exposures in specified
|
||
circumstances.
|
||
First, proposed Rule 4(A) would establish a monthly Intraday Supplemental
|
||
Liquidity Call that is calculated and collected, when applicable, on the first Business Day
|
||
31 Rule 17Ad-22(e)(7)(i) under the Act requires, in part, that NSCC maintain
|
||
sufficient liquid resources at the minimum to effect same-day settlement of
|
||
payment obligations with a high degree of confidence under a wide range of
|
||
foreseeable stress scenarios, including the default of the participant family that
|
||
would generate the largest aggregate payment obligation for the covered clearing
|
||
agency in extreme but plausible market conditions. 17 CFR 240.17Ad22(e)(7)(i).
|
||
Page 39 of 79
|
||
of an Options Expiration Activity Period, which is typically a Friday. 32 This Intraday
|
||
Supplemental Liquidity Call would be calculated as the difference between (1) NSCC’s
|
||
Daily Liquidity Need, recalculated to account for both actual settlement activity
|
||
submitted to NSCC over the course of Business Day and projected activity in stock
|
||
options that is expected to be submitted to NSCC33 and (2) NSCC’s Qualifying Liquid
|
||
Resources. Settlement activity may net with (and offset) the activity that NSCC uses in
|
||
re-calculating the Daily Liquidity Need. In order to account for any potential offsetting
|
||
settling activity, NSCC would adjust the re-calculated Daily Liquidity Need using an
|
||
estimated netting percentage that is based on each Supplemental Liquidity Provider’s
|
||
average percentage of netting observed over the prior 24 months. Under this proposed
|
||
provision, NSCC would adjust the amount of SLD it collects in order to mitigate the
|
||
increased liquidity exposures related to the monthly expiration of stock options.
|
||
Second, proposed Rule 4(A) would allow NSCC to call for additional SLD on an
|
||
intraday basis on any Business Day if a Supplemental Liquidity Provider’s increased
|
||
activity levels causes NSCC’s Daily Liquidity Need to exceed NSCC’s Qualifying Liquid
|
||
Resources and NSCC determines, in its sole discretion, that it is appropriate to require an
|
||
additional intraday SLD from that Supplemental Liquidity Provider in order to mitigate
|
||
32 The proposed Rule 4(A) will retain the existing definition of an Options
|
||
Expiration Activity Period for purposes of this monthly Intraday Supplemental
|
||
Liquidity Call.
|
||
33 Each Business Day, NSCC receives information regarding projected settlement
|
||
activity from The Options Clearing Corporation pursuant to a Stock and Futures
|
||
Settlement Agreement (“OCC Accord”). The OCC Accord provides for the
|
||
clearance and settlement of exercises and assignments of options on eligible
|
||
securities or the maturity of eligible stock futures contracts through NSCC. See
|
||
Securities Exchange Act Release No. 81260 (July 31, 2017), 82 FR 36484
|
||
(August 4, 2017) (File Nos. SR-NSCC-2017-803; SR-OCC-2017-804).
|
||
Page 40 of 79
|
||
those additional liquidity exposures. Under this proposed change, NSCC would have the
|
||
ability to make an Intraday Supplemental Liquidity Call on any Business Day. The
|
||
amount of an Intraday Supplemental Liquidity Call would be the difference between
|
||
NSCC’s Daily Liquidity Need, recalculated for that Business Day taking into account any
|
||
increase in settlement activity, and NSCC’s Qualifying Liquid Resources. This proposed
|
||
provision would allow NSCC to adjust the amount of SLD it collects for a Business Day
|
||
in circumstances when NSCC believes it is necessary to accelerate the collection of
|
||
additional SLD from Supplemental Liquidity Providers whose activity may present
|
||
relatively greater risks to the NSCC on an overnight basis. NSCC would determine if an
|
||
Intraday Supplemental Liquidity Call is appropriate based on a variety of factors and
|
||
circumstances, including, but not limited to, an assessment of a Supplemental Liquidity
|
||
Provider’s ability to meet its projected settlement or Supplemental Liquidity Obligations
|
||
and estimates of settlement activity that could offset settlement exposures and are not
|
||
reflected in NSCC’s liquidity estimates.
|
||
Returns of SLD and Miscellaneous Matters. Proposed Rule 4(A) would provide
|
||
that NSCC would return SLD, including any SLD funded pursuant to an Intraday
|
||
Supplemental Liquidity Call, on the next Business Day unless such amounts are held
|
||
longer by NSCC pursuant to proposed Section 12a of Rule 4(A), as described below.
|
||
Under the current Rule 4(A), NSCC may hold SLD for up to seven Business Days after
|
||
the end of the applicable Options Expiration Activity Period and may hold SLD funded
|
||
pursuant to a Special Activity Liquidity Call for up to 90 days after such deposit is made.
|
||
Under the proposed change, because NSCC would recalculate the Supplemental
|
||
Page 41 of 79
|
||
Liquidity Obligations each Business Day, NSCC would no longer need to hold SLD for
|
||
these extended periods.
|
||
NSCC would amend proposed Section 12a (currently Section 13a) of Rule 4(A) to
|
||
clarify that SLD, as part of Members’ actual deposit to the Clearing Fund, would be
|
||
subject to the provision of Section 9 of Rule 4. Section 9 of Rule 4 addresses NSCC’s
|
||
right to withhold all or any part of any excess deposit of a Member if such Member has
|
||
been placed on the Watch List pursuant to the Rules or if NSCC determines that the
|
||
Member’s anticipated activities in NSCC in the near future may reasonably be expected
|
||
to be materially different than its activities of the recent past.34 Current Section 13a of
|
||
Rule 4(A) addresses how SLD are treated pursuant to other Rules, particularly Rule 4,
|
||
which addresses Members’ deposits to the Clearing Fund. While this proposal would not
|
||
change NSCC’s rights with respect to these funds, it would provide Members with
|
||
greater transparency into how SLD are treated under Rule 4.
|
||
NSCC would also amend the provision in Rule 4(A) that addresses when SLD
|
||
would be returned to a Member that ceases to be a participant. Currently, Rule 4(A)
|
||
states that SLD are not subject to Section 7 of Rule 4 (which addresses how Required
|
||
Fund Deposits are returned to retired Members) and, as such, are returned to retired
|
||
Members as otherwise provided for in Rule 4(A).35 Under the proposed Rule 4(A),
|
||
34 For example, this may occur when an index rebalancing occurs shortly after a
|
||
month-end options expiration period, which could cause an increase in NSCC’s
|
||
liquidity exposures.
|
||
35 Section 7 of Rule 4 provides that Required Fund Deposits to the Clearing Fund in
|
||
the form of cash and securities are returned to retired Members within 30 calendar
|
||
days after all of its transactions have settled and obligations have been satisfied.
|
||
See supra note 4.
|
||
Page 42 of 79
|
||
because NSCC would be able to calculate SLD each Business Day, it would return SLD
|
||
on the Business Day following the calculation date. However, while a firm may still
|
||
have unsettled activity on the day it retires, NSCC would not be able to collect SLD on
|
||
the days following a Member’s retirement. Therefore, NSCC is proposing to amend Rule
|
||
4(A) to require that SLD of a retired Member be treated similarly to other cash Required
|
||
Fund Deposits to the Clearing Fund and be held by NSCC for 30 calendar days after any
|
||
of its open transactions have settled and obligations have been satisfied. This proposed
|
||
change would protect NSCC from liquidity risks presented by open transactions in the
|
||
days following a firm’s retirement and would align the treatment of these funds with the
|
||
treatment of Required Fund Deposits of retired Members.
|
||
The proposed Rule 4(A) would also simplify the additional miscellaneous
|
||
provisions applicable to SLD, which address, for example, NSCC’s right to debit
|
||
Members’ accounts at NSCC if a Supplemental Liquidity Provider fails to meet its
|
||
Supplemental Liquidity Obligation, and the information NSCC makes available to
|
||
Supplemental Liquidity Providers each Business Day regarding SLD calculations. While
|
||
the proposed changes would update and simplify these provisions, they would not
|
||
significantly alter the structure of these provisions, as described below.
|
||
Proposed Changes to Rule 4(A)
|
||
The proposal described above would be implemented into the Rules by amending
|
||
the current Rule 4(A). The specific changes to implement the proposal are described
|
||
below.
|
||
Section 1 (Overview). NSCC is proposing changes to Section 1 of Rule 4(A) to
|
||
simplify the descriptions by removing outdated and unnecessary language. Section 1 of
|
||
Page 43 of 79
|
||
Rule 4(A) would continue to provide the rationale for the SLD requirement, by
|
||
describing NSCC’s liquidity needs and how the SLD requirements are designed to
|
||
contribute to meeting those needs. However, the proposed changes would simplify this
|
||
section by removing a statement that specifically identifies two of NSCC’s principal
|
||
sources of liquidity and would instead more generally refer to NSCC’s sources of
|
||
liquidity. The proposed changes to Section 1 of Rule 4(A) would also remove references
|
||
to options expiration activity periods, which would no longer be applicable to the SLD
|
||
requirement under this proposal.
|
||
Section 2 (Defined Terms). NSCC is proposing several changes to Section 2 of
|
||
Rule 4(A) in order to implement this proposal. As described below, the proposed
|
||
changes to the defined terms address the change in timing of the SLD requirement to
|
||
occur each Business Day and would improve the transparency of Rule 4(A) through
|
||
simplified and clearer defined terms.
|
||
First, Section 2 of proposed Rule 4(A) would remove the definition of “Special
|
||
Activity Calculation Date,” which is tied to the monthly Options Expiration Activity
|
||
Period, and instead would use the term “Business Day” throughout proposed Rule 4(A),
|
||
where appropriate. Business Day is currently defined in Rule 1 as any day on which
|
||
NSCC is open for business. Therefore, this proposed change would provide for the
|
||
calculation of SLD requirements on each day that NSCC is open for business.
|
||
Second, Section 2 of the proposed Rule 4(A) revise other defined terms that use
|
||
the phrase “Special Activity” to either remove that phrase or, when appropriate, to
|
||
replace this phrase with the term “Supplemental.” For example, NSCC would revise the
|
||
defined term “Special Activity Daily Liquidity Need” to “Daily Liquidity Need,” and
|
||
Page 44 of 79
|
||
would revise the defined term “Special Activity Liquidity Provider” to “Supplemental
|
||
Liquidity Provider.” The phrase “Special Activity” was used in the current Rule 4(A) to
|
||
refer to the Options Expiration Activity Period, which would only be applicable to the
|
||
monthly intraday SLD in the proposed Rule 4(A).
|
||
NSCC would also update the definition of Daily Liquidity Need to change a
|
||
reference from a four-day settlement cycle to a three-day settlement cycle, to reflect the
|
||
amendment to Rule 15c6-1(a) under the Act to shorten the standard settlement cycle for
|
||
most broker-dealer transactions.36 Additionally, NSCC would move the defined term for
|
||
“Options Expiration Activity Period” within Section 2 of the proposed Rule 4(A) so it
|
||
continues to appear alphabetically, but is not proposing to change the definition of this
|
||
term.
|
||
Third, the proposed changes to Section 2 of Rule 4(A) would include one defined
|
||
term for “Qualifying Liquid Resources” to refer to all default liquidity resources available
|
||
to NSCC to settle its payment obligations as a central counterparty. As discussed in
|
||
greater detail above, the defined term would provide that NSCC may apply stressed
|
||
market assumptions to its Qualifying Liquid Resources when applying these resources in
|
||
the calculations made under Rule 4(A). In connection with this proposed change, NSCC
|
||
would remove the defined terms “Commitment” and “Credit Facility,” which were used
|
||
in the current Rule 4(A) to refer to NSCC’s Line of Credit, and would remove “Other
|
||
Qualifying Liquid Resources,” which was used to refer to NSCC’s liquid resources other
|
||
than the Clearing Fund and the Line of Credit. This proposed change would simplify
|
||
Rule 4(A) and would account for NSCC’s continuing efforts to expand and diversify its
|
||
36 See 17 CFR 240.15c6-1.
|
||
Page 45 of 79
|
||
default liquidity resources. The proposed change would also clarify that Qualifying
|
||
Liquid Resources would not include SLD for purposes of the calculations in Rule 4(A).
|
||
Fourth, the proposed changes would move certain calculations out of the defined
|
||
terms in Section 2 and include them in the relevant later sections of Rule 4(A). This
|
||
proposed change would simplify and clarify Rule 4(A), which currently requires a reader
|
||
to refer back to the defined terms in Section 2 when reading the calculations and
|
||
requirements set forth in later sections of Rule 4(A). For example, Section 2 of Rule
|
||
4(A) currently includes the calculation of “Special Activity Peak Liquidity Exposure”
|
||
and “Special Activity Peak Liquidity Need.” In the proposed Rule 4(A), NSCC would no
|
||
longer use the calculation of Special Activity Peak Liquidity Exposure in determining the
|
||
Supplemental Liquidity Providers or in calculating those requirements. The calculation
|
||
of Peak Liquidity Need, which would replace Special Activity Peak Liquidity Need,
|
||
would be moved out of Section 2 and into Section 3, where that calculation would be
|
||
described as being used to identify Supplemental Liquidity Providers.
|
||
Finally, the proposed changes to Section 2 of Rule 4(A) would remove defined
|
||
terms that are no longer needed when NSCC calculates SLD requirements daily. For
|
||
example, NSCC would remove defined terms that are related to the Options Expiration
|
||
Activity Period, including “Special Activity Business Day,” which is currently defined as
|
||
a Business Day included in an Options Expiration Activity Period. NSCC would also
|
||
remove the defined term for “Special Activity Prefund Deposit” because it would no
|
||
longer be necessary for Members to prefund their potential SLD requirement in advance
|
||
of NSCC’s calculations when they are done on a daily basis.
|
||
Page 46 of 79
|
||
Section 3 (Supplemental Liquidity Providers). NSCC is proposing to amend
|
||
Section 3 to describe how NSCC would identify the Supplemental Liquidity Providers for
|
||
each Business Day. Section 3 of the proposed Rule 4(A) would state that, each Business
|
||
Day, NSCC would determine the Peak Liquidity Need of each Member during the
|
||
Lookback Period, and would identify the Supplemental Liquidity Providers for that
|
||
Business Day as the 30 (or fewer) Members with the largest Peak Liquidity Need in that
|
||
time period. These changes would implement the proposal described in greater detail
|
||
above to make this calculation daily and to simplify the calculation used to identify
|
||
Supplemental Liquidity Providers by using Peak Liquidity Need rather than using the
|
||
largest exposures of all providers in the Lookback Period.
|
||
Section 4 (Supplemental Liquidity Obligations); Section 5 (Satisfaction of
|
||
Supplemental Liquidity Obligations); and Section 6 (Notice of Supplemental Liquidity
|
||
Obligations and Payment of Supplemental Liquidity Deposits). NSCC would amend
|
||
Sections 4, 5 and 6 of Rule 4(A) to describe the simplified calculation of Supplemental
|
||
Liquidity Obligations, and the process by which Supplemental Liquidity Providers would
|
||
pay their Supplemental Liquidity Obligations after being notified by NSCC. Proposed
|
||
changes to Section 4 would implement the revised calculation of Supplemental Liquidity
|
||
Obligations, described in greater detail above, as the difference between a Supplemental
|
||
Liquidity Provider’s Daily Liquidity Need for that Business Day and the Qualifying
|
||
Liquid Resources available to NSCC on that day. The proposed changes would also
|
||
create a subsection b. of Section 4 to describe the optional, alternative pro rata calculation
|
||
of Supplemental Liquidity Obligations, as described in greater detail above.
|
||
Page 47 of 79
|
||
Proposed changes to Sections 5 and 6 of Rule 4(A) would update the defined
|
||
terms and the timing by when Supplemental Liquidity Providers must fund their
|
||
Supplemental Liquidity Obligations to reflect the change of these obligations to daily.
|
||
Proposed changes to Section 6 of Rule 4(A) would state that the notice provided to
|
||
Supplemental Liquidity Providers regarding their Supplemental Liquidity Obligations
|
||
would state if that amount was calculated pursuant to Section 4b as a pro rata share of the
|
||
largest Supplemental Liquidity Obligation of that Business Day.
|
||
Section 7 (Determination of Intraday Supplemental Liquidity Calls) and Section 8
|
||
(Satisfaction of Intraday Supplemental Liquidity Calls). NSCC would amend Sections 7
|
||
and 8 of Rule 4(A) to reflect the removal of the Special Activity Liquidity Calls and the
|
||
adoption of the two Intraday Supplemental Liquidity Calls, as described in greater detail
|
||
above. The proposed changes to these sections would also update defined terms, as
|
||
appropriate.
|
||
Returns of Supplemental Liquidity Deposits – Section 9 (Deposits Made in
|
||
Satisfaction of a Supplemental Liquidity Obligation) and Section 10 (Ceasing to be a
|
||
Participant). NSCC is proposing to consolidate the current Sections 9 and 10 of Rule
|
||
4(A) into a new Section 9 of Rule 4(A), which would address the return of SLD that are
|
||
made in satisfaction of both Supplemental Liquidity Obligations and Intraday
|
||
Supplemental Liquidity Calls. The proposed changes would provide that SLD made
|
||
pursuant to either Supplemental Liquidity Obligations and Intraday Supplemental
|
||
Liquidity Calls would be returned to Supplemental Liquidity Providers on the next
|
||
Business Day after the calculation date, unless otherwise notified by NSCC.
|
||
Page 48 of 79
|
||
NSCC would amend Section 10 (currently Section 11) to align the treatment of
|
||
SLD of a retired Member with the treatment of such firm’s Required Fund Deposits, as
|
||
described in greater detail above.
|
||
Miscellaneous Matters – Section 11 (Obligations of Affiliated Families and
|
||
Supplemental Liquidity Providers), Section 12 (Application of Supplemental Liquidity
|
||
Deposits) and Section 13 (Information). NSCC would amend Sections 11, 12 and 13
|
||
(currently Sections 12, 13 and 14) of Rule 4(A) to update and simplify these provisions.
|
||
The proposed amendments would not substantially amend the purpose or application of
|
||
these sections.
|
||
Section 11 (currently Section 12) of Rule 4(A) provides that the Supplemental
|
||
Liquidity Obligations of Affiliated Families are the several obligations of all of the
|
||
Members of the Affiliated Family ratably in proportion to their applicable Special
|
||
Activity Peak Liquidity Exposure. NSCC would not change this provision but would
|
||
update it to use revised defined terms. NSCC would also amend Section 11 by
|
||
consolidating two parallel paragraphs into subsection b., which address NSCC’s right to
|
||
collect SLD from Supplemental Liquidity Providers. This proposed change would
|
||
simplify the provision but would not make substantive changes to NSCC’s rights or
|
||
Members’ obligations.
|
||
Section 12 (currently Section 13), which addresses how SLD are treated under
|
||
Rule 4, would be amended to update defined terms and to clarify that SLD may be held
|
||
by NSCC as part of Members’ actual deposits to the Clearing Fund, pursuant to Section 9
|
||
of Rule 4. No substantive changes are proposed to this Section.
|
||
Page 49 of 79
|
||
Section 13 (currently Section 14) describes NSCC’s obligation to provide
|
||
Members with certain information regarding its SLD calculation. NSCC is proposing to
|
||
amend this section to include updated defined terms and to reflect the daily calculation of
|
||
SLD.
|
||
(iv) Impact Study Results
|
||
NSCC has provided the Commission with the results of an impact study that
|
||
reviewed the proposal against the observed regulatory liquidity needs and NSCC’s
|
||
Qualifying Liquid Resources available during the period from 2016 through 2020 to
|
||
assess both pro-forma and hypothetical impacts of the proposal under various liquidity
|
||
scenarios.
|
||
Pro-Forma Impact Study. The pro-forma impact study compared NSCC’s
|
||
regulatory liquidity needs against the Qualifying Liquid Resources that were available
|
||
between 2016 and 2020. The pro-forma analysis indicated that NSCC would expect
|
||
between 1 and 3 Supplemental Liquidity Obligations per year, ranging in size between
|
||
$1.0 billion to $5.4 billion in 2016 through 2019. In calendar year 2020, the impact study
|
||
shows that available Qualifying Liquid Resources for each date would have eliminated
|
||
potential Supplement Liquidity Obligations.
|
||
Additionally, this impact study showed between 4 and 27 actual Supplemental
|
||
Liquidity Obligations were received by NSCC per year, typically averaging $3.6 billion
|
||
during this same period, including 9 actual Supplemental Liquidity Obligations received
|
||
by NSCC in 2020.
|
||
Hypothetical Impact Study. NSCC also developed several hypothetical liquidity
|
||
scenarios to assess the proposal’s impact. When hypothetical Qualifying Liquid
|
||
Page 50 of 79
|
||
Resources available to NSCC are between $17 billion and $22 billion, NSCC would
|
||
expect between 7 and 36 Supplemental Liquidity Obligations per year, ranging in size
|
||
between $2.1 billion to $4.6 billion each; and (2) when the hypothetical Qualifying
|
||
Liquid Resources available to NSCC are $22 billion or above, NSCC would expect
|
||
between 1 and 5 Supplemental Liquidity Obligations per year, ranging in size between
|
||
$2.1 billion to $6.8 billion each.
|
||
NSCC has also provided the Commission with details of potential impacts of the
|
||
proposal on the largest 50 Affiliated Families, a list of the 30 Affiliated Families with the
|
||
largest liquidity exposures as of December 31, 2020, and the respective Affiliated
|
||
Families’ maximum and average NSCC liquidity needs for each calendar year between
|
||
2016 and 2020.
|
||
(v) Implementation Timeframe
|
||
NSCC would implement the proposed changes no later than 10 Business Days
|
||
after the later of the approval of the proposed rule change and no objection to the related
|
||
advance notice37 by the Commission. NSCC would announce the effective date of the
|
||
proposed changes by Important Notice posted to its website.
|
||
2. Statutory Basis
|
||
NSCC believes the proposed changes are consistent with the requirements of the
|
||
Act and the rules and regulations thereunder applicable to a registered clearing agency.
|
||
In particular, NSCC believes the proposed changes are consistent with Section
|
||
37 Supra note 3.
|
||
Page 51 of 79
|
||
17A(b)(3)(F) of the Act,38 and Rules 17Ad-22(e)(7)(i) and (ii), each promulgated under
|
||
the Act,39 for the reasons described below.
|
||
Section 17A(b)(3)(F) of the Act requires that the rules of NSCC be designed to,
|
||
among other things, assure the safeguarding of securities and funds which are in the
|
||
custody or control of the clearing agency or for which it is responsible.40 NSCC believes
|
||
the proposed rule change is designed to assure the safeguarding of securities and funds
|
||
which are in its custody or control or for which it is responsible because the proposal
|
||
would allow NSCC to better limit its liquidity exposure to Members in the event of a
|
||
Member default.
|
||
Specifically, under the proposal, each Business Day NSCC would measure the
|
||
Supplemental Liquidity Obligation of each Supplemental Liquidity Provider as the
|
||
difference between the Daily Liquidity Need of the Supplemental Liquidity Provider
|
||
calculated for that Business Day and the Qualifying Liquid Resources available to NSCC
|
||
on that day assuming stressed market conditions. By making these calculations daily
|
||
based on Members’ current activity and NSCC’s resources currently available to NSCC,
|
||
the proposed SLD requirement would provide NSCC with a more accurate measure of its
|
||
potential liquidity exposures to its Members in the event of a Member default. The
|
||
proposal would also establish a monthly intraday SLD collection in connection with
|
||
options expiration activity that present heighted liquidity exposures, and an optional
|
||
intraday SLD that NSCC may collect when it deems appropriate to mitigate any
|
||
38 15 U.S.C. 78q-1(b)(3)(F).
|
||
39 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
|
||
40 15 U.S.C. 78q-1(b)(3)(F).
|
||
Page 52 of 79
|
||
increased liquidity exposures or in light of other circumstances. These proposed intraday
|
||
SLD would allow NSCC to re-calculate its liquidity exposures and collect sufficient
|
||
liquidity to allow it to complete end-of-day settlement in the event of the default of a
|
||
Member.
|
||
Additionally, by providing an alternative pro rata calculation of Supplemental
|
||
Liquidity Obligations in certain circumstances, the proposal would provide NSCC with
|
||
the flexibility to determine the total amount collected on a Business Day, while
|
||
continuing to collect and hold sufficient liquidity to allow NSCC to complete end-of-day
|
||
settlement in the event of the default of the Member with the largest payment obligations.
|
||
In this way, the proposed change to calculate and collect, when applicable, SLD on a
|
||
daily basis based on current information, and on an intraday basis when NSCC observes
|
||
an increase in its Daily Liquidity Need, would help NSCC assure the safeguarding of
|
||
securities and funds which are in its custody or control or for which it is responsible,
|
||
consistent with the requirements of Section 17A(b)(3)(F) of the Act.41
|
||
The proposed changes to simplify and clarify Rule 4(A), which describes the SLD
|
||
requirement, would also be consistent with the requirements of Section 17A(b)(3)(F) of
|
||
the Act.42 These proposed changes would make the rights and obligations of both NSCC
|
||
and its Members under Rule 4(A) more transparent and easier to understand. A clearer
|
||
rule supports the ability of Members to meet their obligations to provide NSCC with SLD
|
||
when required. The liquidity provided to NSCC through the SLD allows it to complete
|
||
end-of-day settlement in the event of the default of a Member. Therefore, by making the
|
||
41 Id.
|
||
42 Id.
|
||
Page 53 of 79
|
||
provisions of Rule 4(A) clearer, simpler and more transparent to Members, these
|
||
proposed changes also support NSCC’s compliance with the requirements of Section
|
||
17A(b)(3)(F) of the Act to assure the safeguarding of securities and funds which are in
|
||
NSCC’s custody or control or for which it is responsible.43
|
||
Rule 17Ad-22(e)(7)(i) under the Act requires that NSCC establish, implement,
|
||
maintain and enforce written policies and procedures reasonably designed to maintain
|
||
sufficient liquid resources at the minimum in all relevant currencies to effect same-day
|
||
and, where appropriate, intraday and multiday settlement of payment obligations with a
|
||
high degree of confidence under a wide range of foreseeable stress scenarios that
|
||
includes, but is not limited to, the default of the participant family that would generate the
|
||
largest aggregate payment obligation for NSCC in extreme but plausible market
|
||
conditions.44 Rule 17Ad-22(e)(7)(ii) under the Act requires that NSCC establish,
|
||
implement, maintain and enforce written policies and procedures reasonably designed to
|
||
hold qualifying liquid resources sufficient to meet the minimum liquidity resource
|
||
requirement under Rule 17Ad-22(e)(7)(i) in each relevant currency for which NSCC has
|
||
payment obligations owed to its Members.45
|
||
As described above, the proposal would strengthen NSCC’s ability to maintain
|
||
sufficient liquidity to complete end-of-day settlement in the event of the default of a
|
||
43 Id.
|
||
44 17 CFR 240.17Ad-22(e)(7)(i).
|
||
45 17 CFR 240.17Ad-22(e)(7)(ii). For purposes of Rule 17Ad-22(e)(7)(ii),
|
||
“qualifying liquid resources” are defined in Rule 17Ad-22(a)(14) as including, in
|
||
part, cash held either at the central bank of issue or at creditworthy commercial
|
||
banks. Supra note 7.
|
||
Page 54 of 79
|
||
Member. The proposal would do this by allowing NSCC to calculate and collect, when
|
||
applicable, SLD every Business Day from those Members that pose the largest liquidity
|
||
exposures to NSCC on that day. The proposal would also include a mechanism to allow
|
||
NSCC to collect SLD on an intraday basis, including on the first Business Day of the
|
||
Options Expiration Activity Period, when liquidity exposures are historically higher.
|
||
These resources would be available to NSCC to complete end-of-day settlement in the
|
||
event of the default of a Member. Further, SLD are currently, and would continue to be,
|
||
held by NSCC at either its cash deposit account at the Federal Reserve Bank of New
|
||
York, at a creditworthy commercial bank, or in other investments pursuant to the
|
||
Clearing Agency Investment Policy.46 Therefore, SLD would continue to be considered a
|
||
qualifying liquid resource, as defined by Rule 17Ad-22(a)(14) under the Act,47 and would
|
||
support NSCC’s ability to hold qualifying liquid resources sufficient to meet the
|
||
minimum liquidity resource requirement under Rule 17Ad-22(e)(7)(i), as required by
|
||
Rule 17Ad-22(e)(7)(ii). Additionally, the proposed alternative pro rata calculation of
|
||
Supplemental Liquidity Obligations would provide NSCC with the flexibility to
|
||
determine the total amount collected on a Business Day, while continuing to collect and
|
||
hold sufficient liquidity to allow NSCC to complete end-of-day settlement in the event of
|
||
the default of the Member with the largest payment obligations, as required by Rule
|
||
46 See Securities Exchange Act Release Nos. 79528 (December 12, 2016), 81 FR
|
||
91232 (December 16, 2016) (File Nos. SR-DTC-2016-007, SR-FICC-2016-005,
|
||
SR-NSCC-2016-003); 84949 (December 21, 2018), 83 FR 67779 (December 31,
|
||
2018) (File Nos. SR-DTC-2018-012, SR-FICC-2018-014, SR-NSCC-2018-013).
|
||
47 17 CFR 240.17Ad-22(a)(14).
|
||
Page 55 of 79
|
||
17Ad-22(e)(7)(i).48 As such, this proposed change would support NSCC’s ability to hold
|
||
sufficient qualifying liquid resources to meet its minimum liquidity resource requirement
|
||
under Rules 17Ad-22(e)(7)(i) and (ii).49
|
||
(B) Clearing Agency’s Statement on Burden on Competition
|
||
NSCC believes that the proposed rule change could have an impact on
|
||
competition. Specifically, NSCC believes the proposed changes could burden
|
||
competition because they would require those Members that are identified as
|
||
Supplemental Liquidity Providers to make an SLD to the Clearing Fund each Business
|
||
Day, when applicable, rather than only monthly in connection with the expiration of
|
||
stock options.
|
||
Members are currently subject to SLD requirements under Rule 4(A), and, while
|
||
the proposed rule change could result in a Supplemental Liquidity Obligation on a more
|
||
frequent basis, the impact study results, discussed above, show that the proposal would
|
||
not have a significant impact on the frequency or amount of those requirements. The
|
||
Supplemental Liquidity Obligations of Supplemental Liquidity Providers would be in
|
||
direct relation to the specific liquidity exposures presented to NSCC by Members’ daily
|
||
activity. Therefore, Members that present the largest liquidity exposures to NSCC,
|
||
regardless of the type of Member, currently have, and would continue to have, similar
|
||
SLD requirements. The proposed alternative calculation of Supplemental Liquidity
|
||
Obligations would provide NSCC with the flexibility to collect and hold sufficient
|
||
liquidity to meet NSCC’s regulatory obligations while allocating the Supplemental
|
||
48 17 CFR 240.17Ad-22(e)(7)(i).
|
||
49 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
|
||
Page 56 of 79
|
||
Liquidity Obligations on a pro rata basis among the Supplemental Liquidity Providers for
|
||
that Business Day. This proposed change would treat each Supplemental Liquidity
|
||
Provider equally when this alternative calculation is triggered.
|
||
Therefore, NSCC believes that any burden on competition imposed by the
|
||
proposed changes would not be significant and, further, would be both necessary and
|
||
appropriate in furtherance of NSCC’s efforts to mitigate risks and meet the requirements
|
||
of the Act,50 as described in this filing and further below.
|
||
NSCC believes the above described burden on competition that may be created by
|
||
the proposed changes to the SLD requirement would be necessary in furtherance of the
|
||
purposes of the Act, specifically Section 17A(b)(3)(F) of the Act.51 As discussed above,
|
||
the proposed change would improve NSCC’s ability to estimate its liquidity exposures in
|
||
the calculation and collection of SLD by using daily activity rather than estimating
|
||
potential exposures based on activity in a look-back period. In this way, the proposed
|
||
change would improve NSCC’s liquidity risk management by supplementing its liquidity
|
||
resources that are available to it to complete end-of-day settlement in the event of the
|
||
default of a Member. The proposed pro rata alternative calculation of SLD would allow
|
||
NSCC to opt to collect only the largest Supplemental Liquidity Obligation calculated for
|
||
that Business Day, while still meeting NSCC’s applicable regulatory obligations. The
|
||
proposed enhancements to its liquidity risk management would help NSCC assure the
|
||
50 15 U.S.C. 78q-1(b)(3)(I).
|
||
51 15 U.S.C. 78q-1(b)(3)(F).
|
||
Page 57 of 79
|
||
safeguarding of securities and funds which are in its custody or control or for which it is
|
||
responsible, consistent with the requirements of Section 17A(b)(3)(F) of the Act.52
|
||
NSCC believes the above described burden on competition that may be created by
|
||
the proposed changes to the SLD requirement would be necessary in furtherance of the
|
||
purposes of the Act, specifically Section 17A(b)(3)(F) of the Act.53 As discussed above,
|
||
the proposed change would improve NSCC’s ability to estimate its liquidity exposures in
|
||
the calculation and collection of SLD by using daily activity rather than estimating
|
||
potential exposures based on activity in a look-back period. The proposal would also
|
||
establish a monthly intraday SLD to address the additional liquidity exposures that are
|
||
presented by monthly options expiration activity, and an optional intraday SLD that may
|
||
be collected when NSCC deems appropriate. In aggregate, the total SLD collected would
|
||
improve NSCC’s liquidity risk management by supplementing its liquidity resources that
|
||
are available to it to complete end-of-day settlement in the event of the default of a
|
||
Member. The proposed pro rata alternative calculation of SLD would allow NSCC to opt
|
||
to collect only the largest Supplemental Liquidity Obligation calculated for that Business
|
||
Day, while still meeting NSCC’s applicable regulatory obligations. The proposed
|
||
enhancements to its liquidity risk management would help NSCC assure the safeguarding
|
||
of securities and funds which are in its custody or control or for which it is responsible,
|
||
consistent with the requirements of Section 17A(b)(3)(F) of the Act.54
|
||
52 Id.
|
||
53 15 U.S.C. 78q-1(b)(3)(F).
|
||
54 Id.
|
||
Page 58 of 79
|
||
The proposal would strengthen NSCC’s ability to maintain sufficient liquidity to
|
||
complete end-of-day settlement in the event of the default of a Member by allowing
|
||
NSCC to collect SLD each Business Day from those Members that pose the largest
|
||
liquidity exposures to NSCC on that day. Further, SLD are currently, and would
|
||
continue to be, cash deposits to NSCC’s Clearing Fund, which meet the criteria to be
|
||
considered qualifying liquid resources, as defined by Rule 17Ad-22(a)(14) under the
|
||
Act.55 The proposed alternative pro rata calculation would allow NSCC to continue to
|
||
collect sufficient liquidity to meet the requirements of Rule 17Ad-22(e)(7)(i).56 As such,
|
||
this proposed change would support NSCC’s ability to hold sufficient qualifying liquid
|
||
resources to meet its minimum liquidity resource requirement under Rules 17Ad22(e)(7)(i) and (ii).57
|
||
NSCC believes that the above described burden on competition that could be
|
||
created by the proposed changes would be appropriate in furtherance of the purposes of
|
||
the Act because such changes have been designed to assure the safeguarding of securities
|
||
and funds which are in the custody or control of NSCC or for which it is responsible, as
|
||
described in detail above. Under both the current Rule 4(A) and the proposed changes to
|
||
Rule 4(A), the SLD requirements are designed to require those Members whose
|
||
settlement activity pose the largest liquidity exposures to NSCC to provide SLD in the
|
||
amount of such exposures. The proposed changes to Rule 4(A) would better support
|
||
NSCC by allowing it to calculate and collect, when applicable, SLD to address liquidity
|
||
55 17 CFR 240.17Ad-22(a)(14).
|
||
56 17 CFR 240.17Ad-22(e)(7)(i).
|
||
57 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
|
||
Page 59 of 79
|
||
exposures that are presented by the activity of Supplemental Liquidity Providers each
|
||
Business Day rather than only during monthly options expiration periods. The proposed
|
||
rule change would improve NSCC’s ability to measure these liquidity exposures by using
|
||
daily activity rather than estimations based on past activity.
|
||
Therefore, because the proposed changes are designed to provide NSCC with a
|
||
more accurate measure of the liquidity risks presented by Members’ daily activity, NSCC
|
||
believes the proposal would meet NSCC’s risk management goals and its regulatory
|
||
obligations. NSCC believes that it has designed the proposed rule change in an
|
||
appropriate way in order to comply with NSCC’s obligations under the Act. Therefore,
|
||
as described above, NSCC believes the proposed changes are necessary and appropriate
|
||
in furtherance of NSCC’s obligations under the Act,58 specifically Section 17A(b)(3)(F)
|
||
of the Act59 and Rules 17Ad-22(e)(7)(i) and (ii) under the Act.60
|
||
(C) Clearing Agency’s Statement on Comments on the Proposed Rule Change
|
||
Received from Members, Participants, or Others
|
||
NSCC has not received or solicited any written comments relating to this
|
||
proposal. NSCC will notify the Commission of any written comments received by
|
||
NSCC.
|
||
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
|
||
58 15 U.S.C. 78q-1(b)(3)(I).
|
||
59 15 U.S.C. 78q-1(b)(3)(F).
|
||
60 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
|
||
Page 60 of 79
|
||
such longer period to be appropriate and publishes its reasons for so finding or (ii) as to
|
||
which 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.
|
||
The proposal shall not take effect until all regulatory actions required with respect
|
||
to the proposal are completed.
|
||
IV. Solicitation of Comments
|
||
Interested persons are invited to submit written data, views and arguments
|
||
concerning the foregoing, including whether the proposed rule change is consistent with
|
||
the Act. Comments may be submitted by any of the following methods:
|
||
Electronic Comments:
|
||
Use the Commission’s Internet comment form
|
||
(http://www.sec.gov/rules/sro.shtml); or
|
||
Send an e-mail to rule-comments@sec.gov. Please include File Number
|
||
SR-NSCC-2021-002 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-2021-002. This file number
|
||
should be included on the subject line if e-mail 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
|
||
Page 61 of 79
|
||
(http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent
|
||
amendments, all written statements with respect to the proposed rule change that are filed
|
||
with the Commission, and all written communications relating to the proposed rule
|
||
change between the Commission and any person, other than those that may be withheld
|
||
from the public in accordance with the provisions of 5 U.S.C. 552, will be available for
|
||
website viewing and printing in the Commission’s Public Reference Room, 100 F Street,
|
||
NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m.
|
||
and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the
|
||
principal office of NSCC and on DTCC’s website (http://dtcc.com/legal/sec-rulefilings.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-2021-002 and
|
||
should be submitted on or before [insert date 21 days from publication in the Federal
|
||
Register].
|
||
For the Commission, by the Division of Trading and Markets, pursuant to
|
||
delegated authority.61
|
||
Secretary
|
||
61 17 CFR 200.30-3(a)(12).
|
||
Page 62 of 79
|
||
EXHIBIT 3
|
||
Impact Study Data
|
||
January 2016 to December 2020
|
||
|
||
Page 63 of 79
|
||
PAGE REDACTED IN ITS ENTIRETY
|
||
|
||
Page 64 of 79
|
||
PAGE REDACTED IN ITS ENTIRETY
|
||
|
||
Page 65 of 79
|
||
PAGE REDACTED IN ITS ENTIRETY
|
||
|
||
Page 66 of 79
|
||
PAGE REDACTED IN ITS ENTIRETY
|
||
|
||
Page 67 of 79
|
||
PAGE REDACTED IN ITS ENTIRETY
|
||
|
||
Page 68 of 79
|
||
PAGE REDACTED IN ITS ENTIRETY
|
||
|
||
Page 69 of 79
|
||
PAGE REDACTED IN ITS ENTIRETY
|
||
Page 70 of 79
|
||
EXHIBIT 5
|
||
NATIONAL
|
||
SECURITIES
|
||
CLEARING
|
||
CORPORATION
|
||
RULES & PROCEDURES
|
||
TEXT OF PROPOSED RULE CHANGE
|
||
Bold and underlined text indicates proposed added language.
|
||
Bold and strikethrough text indicates proposed deleted language.
|
||
|
||
Page 71 of 79
|
||
RULE 4(A). SUPPLEMENTAL LIQUIDITY DEPOSITS
|
||
[Changes to this Rule 4(A), as amended by File Nos. SR-NSCC-2021-002 and
|
||
SR-NSCC-2021-801, are available at dtcc.com/~/media/Files/Downloads/legal/rulefilings/2021/NSCC/SR-NSCC-2021-002.pdf and at
|
||
dtcc.com/~/media/Files/Downloads/legal/rule-filings/2021/NSCC/SR-NSCC2021-801.pdf, respectively. These changes have been approved by the Securities
|
||
and Exchange Commission but have not yet been implemented. By no later than
|
||
[insert date no later than 10 Business Days after the later of the approval of
|
||
SR-NSCC-2021-002 and no objection to SR-NSCC-2021-801 by the Securities and
|
||
Exchange Commission], these changes will be implemented, and this legend will
|
||
be automatically removed from this Rule 4(A).]
|
||
SEC. 1. Overview. The Corporation requires sufficient liquidity to enable it to
|
||
effect the settlement of its payment obligations as a central counterparty. The two
|
||
principal sources of liquidity for the Corporation currently are deposits to the
|
||
Clearing Fund and a committed line of credit.to meet its regulatory obligations. A
|
||
substantial proportion of the liquidity needed by the Corporation for these purposes is
|
||
attributable to the exposure presented to the Corporation by its Members who would
|
||
generate the largest settlement debits during options expiration activity periods in
|
||
stressed market conditions. In order to ensure that the Corporation has sufficient
|
||
liquidity to meet its payment and regulatory obligations, it is appropriate that such
|
||
Members shall provide additional liquidity to the Corporation in the form of
|
||
supplemental liquidity deposits to the Clearing Fund, offset by (i) commitments under
|
||
the line of credit and (ii) any to supplement the Corporation’s other qualifying
|
||
liquid resources the Corporation may securesources of liquidity pursuant to
|
||
settle its payment obligations as a central counterparty.this Rule 4(A). This Rule
|
||
4(A) describes how such additional liquidity in the form of supplemental liquidity
|
||
deposits to the Clearing Fund shall be calculated and provided.
|
||
SEC. 2. Defined Terms. The following terms shall have the meanings specified
|
||
below for purposes of this Rule 4(A):
|
||
“Affiliate” means a person that controls or is controlled by or is under common
|
||
control with another person. Control of a person means the direct or indirect ownership
|
||
or power to vote more than 50% of any class of the voting securities or other voting
|
||
interests of any person.
|
||
“Affiliated Family” means a group of Members, excluding from the group any
|
||
Member that is a securities clearinghouse, depository, exchange or other market
|
||
infrastructure, in which each Member in the group is an Affiliate of at least one other
|
||
Member in the group.
|
||
“Commitment” means a commitment to lend to the Corporation under the
|
||
Credit Facility.
|
||
Page 72 of 79
|
||
“Credit Facility” means the committed line of credit maintained by the
|
||
Corporation to enable the Corporation to satisfy losses and liabilities incident to
|
||
the operation of its clearance and settlement business.
|
||
“Options Expiration Activity Period” means the period (i) beginning at the
|
||
opening of business on the Friday preceding the Saturday that is the monthly
|
||
expiration date for stock options (or the Business Day before that if such Friday
|
||
is not a Business Day) and (ii) ending at the close of business on the second
|
||
Settlement Day following such date. If the monthly expiration date for stock
|
||
options is changed to a Friday, the “Options Expiration Activity Period” shall
|
||
mean the period (i) beginning at the opening of business on such Friday (or the
|
||
Business Day before that if such Friday is not a Business Day) and (ii) ending at
|
||
the close of business on the second Settlement Day following such date.
|
||
“Other Qualifying Liquid Resources” means liquid resources, other than
|
||
the Clearing Fund and Credit Facility, available to the Corporation to enable the
|
||
Corporation to settle its payment obligations as a central counterparty in
|
||
stressed market conditions.
|
||
“Special Activity Business Day” means a Business Day that is included in
|
||
an Options Expiration Activity Period.
|
||
“Special Activity Calculation Date” has the meaning given to such term in
|
||
Section 3 below.
|
||
“Special Activity Daily Liquidity Need” means, on any Special Activity
|
||
Business Day, the amount of liquid resources, as calculated and determined by the
|
||
Corporation, needed to effect the settlement of its payment obligations as a central
|
||
counterparty over a fourthree day settlement cycle, assuming the default on that
|
||
Business Dayday of thean Unaffiliated Member or Affiliated Family that would cause
|
||
the largest liquidity exposure to the Corporation over that cycle in stressed
|
||
market conditions.
|
||
“Special ActivityIntraday Supplemental Liquidity Call” has the meaning given
|
||
to such term in Section 7 below.
|
||
“Special Activity Liquidity Obligation” has the meaning given to such term
|
||
in Section 4 below.
|
||
“Special Activity Liquidity Provider” has the meaning given to such term in
|
||
Section 4 below.
|
||
“Special Activity Lookback Period” means, with respect to the 24 month period
|
||
(or longer period as determined by the Corporation in its discretion) ending on the
|
||
applicable Special Activity Calculation Date, prior to each Options Expiration
|
||
Activity Period that falls within the same calendar month as the calendar month
|
||
of the applicable Special Activity Calculation DateBusiness Day.
|
||
Page 73 of 79
|
||
“Options Expiration Activity Period” means the period (i) beginning at the
|
||
opening of business on the Friday preceding the Saturday that is the monthly
|
||
expiration date for stock options (or the Business Day before that if such Friday
|
||
is not a Business Day) and (ii) ending at the close of business on the second
|
||
Settlement Day following such date. If the monthly expiration date for stock
|
||
options is changed to a Friday, the “Options Expiration Activity Period” shall
|
||
mean the period (i) beginning at the opening of business on such Friday (or the
|
||
Business Day before that if such Friday is not a Business Day) and (ii) ending at
|
||
the close of business on the second Settlement Day following such date.
|
||
“Special Activity Peak Liquidity Exposure Need” means: has the meaning
|
||
given to such term in Section 3 below.
|
||
a. with respect to an Unaffiliated Member, the amount by which the
|
||
largest Special Activity Supplemental Liquidity Need that the
|
||
Corporation would have in the event of the default of such
|
||
Unaffiliated Member on any Special Activity Business Day during the
|
||
applicable Special Activity Lookback Period exceeds, on the
|
||
applicable Special Activity Calculation Date, the sum of (i) all
|
||
Commitments under the Credit Facility and (ii) all Other Qualifying
|
||
Liquid Resources;
|
||
b. with respect to a Member of an Affiliated Family, the amount by
|
||
which the largest Special Activity Supplemental Liquidity Need that
|
||
the Corporation would have in the event of the default of such
|
||
Member on any Special Activity Business Day during the applicable
|
||
Special Activity Lookback Period exceeds, on the applicable Special
|
||
Activity Calculation Date, the sum of (i) all Commitments under the
|
||
Credit Facility and (ii) all Other Qualifying Liquid Resources; and
|
||
c. with respect to an Affiliated Family, the amount by which the largest
|
||
Special Activity Supplemental Liquidity Need that the Corporation
|
||
would have in the event of the simultaneous default of all Members
|
||
of that Affiliated Family on any Special Activity Business Day during
|
||
the applicable Special Activity Lookback Period exceeds, on the
|
||
applicable Special Activity Calculation Date, the sum of (i) all
|
||
Commitments under the Credit Facility and (ii) all Other Qualifying
|
||
Liquid Resources.
|
||
“Special Activity Peak Liquidity Need” means, on any Special Activity
|
||
Calculation Date, the amount by which the largest Special Activity Supplemental
|
||
Liquidity Need observed at any time during any Options Expiration Activity
|
||
Period exceeds, on such Special Activity Calculation Date, the sum of (i) all
|
||
Commitments under the Credit Facility and (ii) all Other Qualifying Liquid
|
||
Resources.
|
||
Page 74 of 79
|
||
“Special Activity Peak Liquidity Need Date” means the date of the
|
||
applicable Special Activity Peak Liquidity Need.
|
||
“Special Activity Prefund Deposit” means a cash deposit of a Member to
|
||
the Clearing Fund made by wire transfer to an account designated by the
|
||
Corporation:
|
||
a. that is in excess of the Required Fund Deposit of the Member;
|
||
b. that the Member deposits to the Clearing Fund, not later than the
|
||
time specified by the Corporation on the first Business Day of an
|
||
Options Expiration Activity Period, if the Member anticipates that its
|
||
Special Activity Peak Liquidity Exposure at any time during such
|
||
Options Expiration Activity Period will be greater than the amount
|
||
calculated by the Corporation pursuant to this Rule 4(A);
|
||
c. that the Member undertakes to keep on deposit in the Clearing Fund
|
||
for at least seven Business Days after the end of the applicable
|
||
Options Expiration Activity Period; and
|
||
d. that the Member designates as a “Special Activity Prefund Deposit”
|
||
at the time of the deposit in a manner specified by the Corporation.
|
||
“Special Activity Supplemental “Qualifying Liquid Resources” means, as of
|
||
each Business Day, the liquid resources available to the Corporation to enable it
|
||
to settle its payment obligations as a central counterparty in stressed market
|
||
conditions (as described below), which may include (i) a commitment to lend
|
||
under a committed line of credit maintained by the Corporation to enable it to
|
||
satisfy losses and liabilities incident to the operation of its clearance and
|
||
settlement business; (ii) actual deposits to its Clearing Fund, including
|
||
Supplemental Liquidity Deposits; and (iii) any other prefunded or committed
|
||
liquidity resources that the Corporation may use to settle its payment obligations
|
||
as a central counterparty. Qualifying Liquid Resources would not include
|
||
Supplemental Liquidity Deposits for purposes of this Rule 4(A). In order to
|
||
simulate stressed market conditions, the Corporation would apply assumptions
|
||
to the size and availability of its Qualifying Liquid Resources when applying these
|
||
resources in the calculations made under this Rule 4(A).
|
||
“Supplemental Liquidity Deposit” shall have the meaning given to such term in
|
||
Section 5, and shall include any amount deposited to the Clearing Fund in satisfaction
|
||
of (i) a Special ActivitySupplemental Liquidity Obligation (pursuant to Section 64
|
||
below) or (ii) a Special Activity an Intraday Supplemental Liquidity Call (pursuant to
|
||
Section 87 below). All Special Activity Supplemental Liquidity Deposits shall be
|
||
made in cash by wire transfer to an account designated by the Corporation.
|
||
“Special Activity Supplemental Liquidity ObligationNeed” means, on any
|
||
Special Activity Business Day, the amount by which the Special Activity Daily
|
||
Page 75 of 79
|
||
Liquidity Need of the Corporation exceeds the sum of all Required Fund Deposits
|
||
has the meaning given to such term in Section 4 below.
|
||
“Supplemental Liquidity Provider” has the meaning given to such term in
|
||
Section 3 below.
|
||
“Unaffiliated Member” means a Member that (i) is not in any Affiliated Family and
|
||
(ii) is not a securities clearinghouse, depository, exchange or other market
|
||
infrastructure.
|
||
Capitalized terms that are used but not defined in this Rule 4(A) shall have the
|
||
meanings given to such terms elsewhere in these Rules.
|
||
Special ActivitySupplemental Liquidity Obligations
|
||
SEC. 3. Special Activity Calculation Date Determinations. Supplemental
|
||
Liquidity Providers. On a day that is no later than the fifth each Business Day
|
||
preceding any Options Expiration Activity Period (the “Special Activity
|
||
Calculation Date”), the Corporation shall determine: the “Peak Liquidity Need” of
|
||
each Member, which shall be:
|
||
a. the Special Activity For Unaffiliated Members, the largest Daily
|
||
Liquidity Need ofthat the Corporation on each Special Activity would
|
||
have in the event of the default of such Unaffiliated Member on any
|
||
Business Day ofduring the applicable Special Activity Lookback
|
||
Period;.
|
||
b. the Special Activity Supplemental For Members of an Affiliated
|
||
Family, the largest Daily Liquidity Need ofthat the Corporation would
|
||
have in the event of the default of such Member on each Special
|
||
Activityany Business Day ofduring the applicable Special Activity
|
||
Lookback Period;
|
||
c. and with respect to an Affiliated Family, the Special Activity
|
||
Peaklargest Daily Liquidity Need ofthat the Corporation would have in
|
||
the event of on the applicable Special Activity Calculation Date;
|
||
d. the Special Activity Peak Liquidity Exposure of each Unaffiliated
|
||
Member or Affiliated Family during the applicable Special Activity
|
||
Lookback Period; and
|
||
e. the 30 (or fewer) Unaffiliatedsimultaneous default of all Members orof
|
||
that Affiliated Families with the largest Special Activity Peak Liquidity
|
||
ExposuresFamily on any Business Day during the applicable Special
|
||
Activity Lookback Period.
|
||
SEC. 4. Special Activity Liquidity Obligations and Providers. The 30 (or
|
||
fewer) Unaffiliated Members or Affiliated Families with the largest Special Activity
|
||
Page 76 of 79
|
||
Peak Liquidity ExposuresNeed during the applicable Special Activity Lookback
|
||
Period shall be “Supplemental Liquidity Providers” for that Business Day.
|
||
SEC 4. Supplemental Liquidity Obligations.
|
||
a. On each Business Day, (each, a “Special Activity Supplemental
|
||
Liquidity Provider”) shall have a supplemental liquidity obligation to the
|
||
Corporation (a “Special ActivitySupplemental Liquidity Obligation”),”)
|
||
determined for each Special Activity Liquidity Provider in accordance
|
||
with the following formula:
|
||
A = B multiplied by (minus C divided by D), where --
|
||
A is the Special ActivitySupplemental Liquidity Obligation of such
|
||
Special Activity Supplemental Liquidity Provider;
|
||
B is the Daily Liquidity Need of the Supplemental Liquidity
|
||
Provider calculated for that Business Day; and
|
||
CB is the Special Activity Peak Liquidity Needsum of all Qualifying
|
||
Liquid Resources available to the Corporation on the applicable
|
||
Special Activity Calculation Date;that Business Day assuming
|
||
stressed market conditions.
|
||
C is the Special Activity Peak Liquidity Exposure of such Special
|
||
Activity Liquidity Provider during the applicable Special Activity
|
||
Lookback Period; and
|
||
D is the aggregate amount of the Special Activity Peak Liquidity
|
||
Exposures of all Special Activity Liquidity Providers during the
|
||
applicable Special Activity Lookback Period.
|
||
b. If two or more Supplemental Liquidity Providers have a
|
||
Supplemental Liquidity Obligation of more than $2 billion, as
|
||
determined pursuant to subsection a. above, the Corporation may, in
|
||
its sole discretion, determine the Supplemental Liquidity Obligation
|
||
of each Supplemental Liquidity Provider as its pro rata share of the
|
||
largest Supplemental Liquidity Obligation calculated for that
|
||
Business Day.
|
||
SEC. 5. Satisfaction of Special Activity Supplemental Liquidity Obligations. In
|
||
satisfaction of its Special ActivitySupplemental Liquidity Obligation to the Corporation,
|
||
a Special ActivitySupplemental Liquidity Provider shall make a supplemental liquidity
|
||
deposit (a “Special Activity Supplemental Liquidity Deposit”) to the Clearing Fund in
|
||
an amount equal to its Supplemental Activity Liquidity Obligation.
|
||
SEC. 6. Notice of Special ActivitySupplemental Liquidity Obligations and
|
||
Payment of Special Activity Supplemental Liquidity Deposits. Promptly after the
|
||
Page 77 of 79
|
||
Special Activity Calculation DateOn each Business Day, the Corporation shall
|
||
provide each Special ActivitySupplemental Liquidity Provider with the amount of its
|
||
Special ActivitySupplemental Liquidity Obligation for that Options Expiration
|
||
Activity Period. Not later thanBusiness Day. Such notice shall state if the
|
||
closeSupplemental Liquidity Obligation was calculated pursuant to Section 4b of
|
||
business onthis Rule. Within one hour of demand, unless otherwise determined
|
||
by the second Business Day preceding the applicable Options Expiration Activity
|
||
PeriodCorporation, a Special ActivitySupplemental Liquidity Provider shall make its
|
||
Special Activity Supplemental Liquidity Deposit to the Clearing Fund.
|
||
Special ActivityIntraday Supplemental Liquidity Calls
|
||
SEC. 7. Determination of Special ActivityIntraday Supplemental Liquidity
|
||
Calls.
|
||
a. If, with respect to any Special Activity on the first Business Day of an
|
||
Options Expiration Activity Period between Special Activity Calculation Dates, the
|
||
Corporation observes an increase in its Special Activity Supplemental Liquidity
|
||
Need in excess of such threshold as may be determined by the Corporation from
|
||
time to timeDaily Liquidity Need, the Corporation shall be entitled to call on the
|
||
Member Supplemental Liquidity Providers whose increase in activity levels or
|
||
projected settlement activity with respect to monthly expiration of stock options
|
||
caused (or was the primary cause of) such increase in the Special Activity
|
||
SupplementalDaily Liquidity Need of the Corporation to deposit to the Clearing Fund,
|
||
as an addition to its Special Activity Supplemental Liquidity Deposit, an amount equal
|
||
to the difference between (i) the Special Activity SupplementalDaily Liquidity Need of
|
||
the Corporation on such Special Activity Business DayBusiness Day, adjusted to
|
||
account for such increased activity levels and projected settlement activity, and
|
||
(ii) the sum, on such Special Activity Business Day, of (w) all Special Activity
|
||
Supplemental Deposits, (x) all Commitments under the Credit Facility, (y) all
|
||
Other Qualifying Liquid Resources and (z) an amount of Special Activity Prefund
|
||
Deposits up to such limit as may be determined by the Corporation from time to
|
||
time (a “Special Activity all Qualifying Liquid Resources assuming stressed
|
||
market conditions (an “Intraday Supplemental Liquidity Call”). For purposes of
|
||
this Section 7a, the Corporation would adjust the re-calculated Daily Liquidity
|
||
Need using an estimated netting percentage that is based on that Supplemental
|
||
Liquidity Provider’s average percentage of netting observed over the prior 24
|
||
months.
|
||
b. If, on any Business Day other than the first Business Day of an
|
||
Options Expiration Activity Period, the Corporation observes an increase in its
|
||
Daily Liquidity Need, the Corporation shall be entitled to call on the Supplemental
|
||
Liquidity Providers whose increase in activity levels caused (or was the primary
|
||
cause of) such increase in the Daily Liquidity Need of the Corporation to deposit
|
||
an Intraday Supplemental Liquidity Call in an amount equal to the difference
|
||
between (i) the Daily Liquidity Need of the Corporation on such Business Day,
|
||
adjusted to account for such increased activity levels, and (ii) the sum, on such
|
||
Page 78 of 79
|
||
Business Day, of all Qualifying Liquid Resources assuming stressed market
|
||
conditions.
|
||
SEC. 8. Satisfaction of Special ActivityIntraday Supplemental Liquidity Calls.
|
||
On the first Business Day after receipt of a Special Activity Liquidity Call from
|
||
Unless otherwise determined by the Corporation, or such later time as the
|
||
Corporation may specify but not later than 10 a.m. on the second Business Day
|
||
after receipt of a Special Activity within one hour of demand of an Intraday
|
||
Supplemental Liquidity Call from the Corporation, a Member shall make a Special
|
||
Activityan additional Supplemental Liquidity Deposit to the Clearing Fund in the
|
||
amount of the Special ActivityIntraday Supplemental Liquidity Call.
|
||
Returns of Special Activity Supplemental Liquidity Deposits
|
||
SEC. 9. Deposits Made in Satisfaction of a Supplemental Liquidity Obligation.
|
||
A Special ActivitySupplemental Liquidity Provider shall be entitled to a return of the
|
||
amount of its Special Activity Supplemental Liquidity Deposit made in satisfaction of a
|
||
Supplemental Activity Liquidity Obligation or Intraday Supplemental Liquidity Call,
|
||
payable sevenon the Business DaysDay following after the end of the applicable
|
||
Options Expiration Activity PeriodBusiness Day on which the Supplemental
|
||
Liquidity Deposit was made, unless otherwise notified by the Corporation.
|
||
SEC. 10. Deposits Made in Satisfaction of a Liquidity Call. A Special
|
||
Activity Liquidity Provider shall be entitled to a return of the amount of its Special
|
||
Activity Liquidity Deposit made in satisfaction of a Special Activity Liquidity Call,
|
||
payable 90 days after the date of such deposit.
|
||
SEC. 11. Ceasing to be a Participant. Special Activity Supplemental Liquidity
|
||
Deposits shall not be subject to the provisions of Section 7 of Rule 4 relating to the
|
||
thirty (30) calendar day deferral of refundsrefund of deposits to the Clearing Fund
|
||
when a Member ceases to be a participant.
|
||
Miscellaneous Matters
|
||
SEC. 12.11. Obligations of Affiliated Families and Unaffiliated Members
|
||
Supplemental Liquidity Providers.
|
||
a. The Special ActivitySupplemental Liquidity Obligations of an Affiliated
|
||
Family shall be the several obligations of all of the Members of the
|
||
Affiliated Family ratably in proportion to their applicable Special Activity
|
||
Peak Liquidity ExposuresNeed.
|
||
b. In the event of any failure of an Unaffiliated Membera Supplemental
|
||
Liquidity Provider to satisfy a Special ActivitySupplemental Liquidity
|
||
Obligation in full when due, the Corporation may (i) debit the amount of
|
||
any such deficiency to the account of such Unaffiliated Member,
|
||
(ii) collect such amount in system wide settlement, and (iii) credit such
|
||
amount as a Special Activity Supplemental Liquidity Deposit for the
|
||
Page 79 of 79
|
||
account of such Unaffiliated Member. The Corporation may also
|
||
exercise any and all of its other default rights under these Rules.
|
||
c. In the event of any failure of a Member of an Affiliated Family to
|
||
satisfy a Special Activity Liquidity Obligation in full when due, the
|
||
Corporation may, (i) debit the amount of any such deficiency to the
|
||
account of such Member, (ii) collect such amount in system wide
|
||
settlement and (iii) credit such amount as a Special Activity
|
||
Supplemental Deposit for the account of such Member. The
|
||
Corporation may also exercise any and all of its other default rights
|
||
under these Rules.
|
||
SEC. 13. 12. Application of Special Activity Supplemental Liquidity Deposits.
|
||
a. A Special Activity Supplemental Liquidity Deposit of a Member may not
|
||
be withdrawn by the Member unless it is entitled to a return of such deposit
|
||
pursuant to Sections 9 or 10 above. Notwithstanding Sections 9 and 10
|
||
of this Rule, the Supplemental Liquidity Deposit of a Member may be
|
||
held by the Corporation pursuant to Section 9 of Rule 4.
|
||
b. A Special Activity Supplemental Liquidity Deposit of a Member shall form
|
||
a part of the Actual Depositactual deposit of the Member to the Clearing
|
||
Fund but shall be in addition to, and separate from, (i) the Required Fund
|
||
Deposit of the Member and (ii) any other deposit of the Member to the
|
||
Clearing Fund.
|
||
c. A Special Activity Supplemental Liquidity Deposit of a Member (i) may
|
||
be invested, paid, applied and loaned as provided in Section 2 of Rule 4
|
||
and (ii) may be used to satisfy a loss or liability as provided in Sections 3
|
||
or 13 of Rule 4.
|
||
d. A Special Activity Supplemental Liquidity Deposit of a Member may not
|
||
be used to calculate or be applied to satisfy any pro rata charge pursuant
|
||
to Section 4 of Rule 4.
|
||
SEC. 14. 13. Information. To enable MembersSupplemental Liquidity
|
||
Providers to understand and manage their obligations to the Corporation:
|
||
a. , on each Business Day, the Corporation shall make available to each
|
||
MemberSupplemental Liquidity Provider the amount of the liquidity
|
||
needDaily Liquidity Need that the Corporation would have had in the event
|
||
of the default of such Member on the preceding Business Day; and
|
||
b. promptly after each Special Activity Calculation Date, the Corporation
|
||
shall provide each Special Activity Liquidity Provider with the amount
|
||
of its Special Activity Liquidity Obligation for the following Options
|
||
Expiration Activity Period.
|