81 FR 63511 - Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Describe the Backtesting Charge and the Bank Holiday Charge That May Be Imposed on Members

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 179 (September 15, 2016)

Page Range		63511-63514
FR Document		2016-22157
Federal Register, Volume 81 Issue 179 (Thursday, September 15, 2016)
[Federal Register Volume 81, Number 179 (Thursday, September 15, 2016)]
[Notices]
[Pages 63511-63514]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-22157]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78808; File No. SR-NSCC-2016-004]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Describe the 
Backtesting Charge and the Bank Holiday Charge That May Be Imposed on 
Members

September 9, 2016.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 2, 2016, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the clearing agency. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to the Rules and 
Procedures of NSCC (``NSCC Rules'') \3\ in order to include two margin 
charges (the ``Backtesting Charge'' and ``Bank

[[Page 63512]]

Holiday Charge'' as further described below) that may be imposed on 
NSCC Members. The Backtesting Charge is assessed for those Members 
whose portfolios experience backtesting deficiencies over the prior 12-
month period, as described further below. The Backtesting Charge is 
calculated to mitigate exposures to the Corporation caused by 
settlement risks that may not be adequately captured by the 
Corporation's portfolio volatility model. The Bank Holiday Charge is 
applied to all NSCC Members on the business day prior to any day on 
which the U.S. equities markets are open for trading, but the Board of 
Governors of the Federal Reserve System observes a holiday and banks 
are closed (``Holiday''). The Bank Holiday Charge addresses the risk 
exposure that a Member's trading activity on the applicable Holiday 
poses to the Corporation. The proposed rule change would amend NSCC 
Procedure XV to include the Backtesting Charge and Bank Holiday Charge 
as additional charges that may be added to its Members' Clearing Fund 
Required Deposit, including the manner and circumstances in which NSCC 
calculates and imposes such charges. NSCC is filing this proposed rule 
change in order to provide transparency in the NSCC Rules with respect 
to these existing charges, as described in greater detail below.
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    \3\ The NSCC Rules are available at http://www.dtcc.com/legal/rules-and-procedures. Capitalized terms used herein and not 
otherwise defined shall have the meaning assigned to such terms in 
the NSCC Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The proposed rule change provides transparency in the NSCC Rules 
with respect to the Backtesting Charge and the Bank Holiday Charge, two 
margin charges that NSCC may temporarily impose on a Member as part of 
such Member's Required Deposit to the NSCC Clearing Fund.
    NSCC may impose the Backtesting Charge on an NSCC Member when the 
Corporation has observed deficiencies in the backtesting of such 
Member's Required Deposit over the prior 12-month period, such that 
NSCC determines the value-at-risk (``VaR'') margin charge being 
calculated for that Member may not fully address the projected 
liquidation losses estimated from that Member's settlement activity.
    The Bank Holiday Charge addresses the risk exposure that occurs on 
Holidays when NSCC is unable to collect Clearing Fund from its Members. 
NSCC imposes the Bank Holiday Charge on all Members to cover the 
additional day of exposure that is not contemplated in the prior day's 
VaR charge.
(i) Background
A. Backtesting and the Required Deposit
    NSCC's Clearing Fund addresses potential Member exposure through a 
number of risk-based component charges (as margin) calculated and 
assessed daily. Each of the component charges collectively constitute 
[sic] a Member's Required Deposit. The objective of the Required 
Deposit is to mitigate potential losses to NSCC associated with 
liquidation of the Member's portfolio in the event that NSCC ceases to 
act for a Member (hereinafter referred to as a ``default''). NSCC 
determines Required Deposit amounts using a risk-based margin 
methodology that is intended to capture market price risk. The 
methodology uses historical market moves to project or forecast the 
potential gains or losses on the liquidation of a defaulting Member's 
portfolio, assuming that a portfolio would take three days to liquidate 
or hedge in normal market conditions. The projected liquidation gains 
or losses are used to determine the Member's Required Deposit, which is 
calculated to cover projected liquidation losses at a 99 percent 
confidence level. The aggregate of all Members' Required Deposits 
constitutes NSCC's Clearing Fund, which NSCC would be able to access 
should a defaulting Member's own Required Deposit be insufficient to 
satisfy losses to NSCC caused by the liquidation of that Member's 
portfolio.
    NSCC employs daily backtesting to determine the adequacy of each 
Member's Required Deposit. NSCC compares the Required Deposit \4\ for 
each Member with the simulated liquidation gains/losses using the 
actual positions in the Member's portfolio, and the actual historical 
security returns. NSCC investigates the cause(s) of any backtesting 
deficiencies. As a part of this investigation, NSCC pays particular 
attention to Members with backtesting deficiencies that bring the 
results for that Member below the 99 percent confidence target (i.e., 
greater than two backtesting deficiency days in a rolling twelve-month 
period) to determine if there is an identifiable cause of repeat 
backtesting deficiencies. NSCC also evaluates whether multiple Members 
may experience backtesting deficiencies for the same underlying reason.
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    \4\ For backtesting comparisons, NSCC uses the Required Deposit 
amount, without regard to the actual collateral posted by the 
Member.
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    While multiple factors may contribute to a Member's backtesting 
deficiency, NSCC has observed that some Members with position increases 
after the calculation of their Required Deposit may incur backtesting 
deficiencies due to the additional exposure that is not mitigated until 
the collection of the Required Deposit on the next business day.
B. Calculation of the Backtesting Charge
    The objective of the Backtesting Charge is to increase Required 
Deposits for Members that are likely to experience backtesting 
deficiencies on the basis described above by an amount sufficient to 
maintain such Member's backtesting coverage above the 99 percent 
confidence threshold. Because the settlement activity and size of the 
backtesting deficiencies varies among impacted Members, NSCC must 
assess a Backtesting Charge that is specific to each impacted Member. 
To do so, NSCC examines each impacted Member's historical backtesting 
deficiencies observed over the prior 12-month period to identify the 
three largest backtesting deficiencies that have occurred during that 
time. The presumptive Backtesting Charge amount equals that Member's 
third largest historical backtesting deficiency, subject to adjustment 
as further described below. NSCC believes that applying an additional 
margin charge equal to the third largest historical backtesting 
deficiency to a Member's Required Deposit would bring the Member's 
historically-observed backtesting coverage above the 99 percent 
target.\5\ If assessed, the resulting Backtesting Charge is added to 
the Required Deposit for such Member determined pursuant to NSCC's 
risk-based margining methodology, and is imposed on a daily basis for a 
one-month period.
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    \5\ Each occurrence of a backtesting deficiency reduces a 
Member's overall backtesting coverage by 0.4 percent (1 exception/
250 observation days). Accordingly, an increase equal to the third 
largest backtesting deficiency would bring backtesting coverage up 
to 99.2 percent.
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    This charge is only applicable to those Members whose overall 12-
month

[[Page 63513]]

trailing backtesting coverage falls below the 99 percent coverage 
target.
    Although the third largest historical backtesting deficiency for a 
Member is used as the Backtesting Charge in most cases, NSCC retains 
discretion to adjust the charge amount based on other circumstances 
that may be relevant for assessing whether an impacted Member is likely 
to experience future backtesting deficiencies and the estimated size of 
such deficiencies. Examples of relevant circumstances that would be 
considered in calculating the final, applicable Backtesting Charge 
amount include material differences in the three largest backtesting 
deficiencies observed over the prior 12-month period, variability in 
the net settlement activity after the collection of the Member's 
Required Deposit, seasonality in observed backtesting deficiencies and 
observed market price volatility in excess of the Member's historical 
VaR charge. Based on NSCC's assessment of the impact of these 
circumstances on the likelihood of, and estimated size of, future 
backtesting deficiencies for a Member, NSCC may, in its discretion, 
adjust the Backtesting Charge for such Member in an amount that NSCC 
determines to be more appropriate for maintaining such Member's 
backtesting results above the 99 percent coverage threshold (including 
a reasonable buffer).
C. Communication With Members and Imposition of the Backtesting Charge
    If NSCC determines that a Backtesting Charge should apply to a 
Member that was not assessed a Backtesting Charge during the 
immediately preceding month or that the Backtesting Charge applied to a 
Member during the previous month should be increased, NSCC will notify 
the Member on or around the 25th calendar day of the month prior to the 
assessment of the Backtesting Charge, or prior to the increase to the 
Backtesting Charge.
    NSCC imposes the Backtesting Charge as an additional charge applied 
to each impacted Member's Required Deposit on a daily basis for a one 
month period, and reviews each applied Backtesting Charge each month. 
If an impacted Member's trailing 12-month backtesting coverage exceeds 
99 percent (without taking into account historically-imposed 
Backtesting Charges), the Backtesting Charge is removed.
D. Holidays and the Required Deposit
    As described above, NSCC determines its Members' Required Deposit 
amounts using a risk-based margin methodology that is intended to 
capture market price risk, assuming that a portfolio would take three 
days to liquidate or hedge in normal market conditions.
    The Bank Holiday Charge may be applied on the business day prior to 
any Holiday. This charge approximates the exposure that a Member's 
trading activity on the applicable Holiday could pose to NSCC. Since 
NSCC cannot collect margin on the Holiday, the Bank Holiday Charge is 
due on the business day prior to the applicable Holiday.
E. Calculation and Notification of the Holiday Charge
    NSCC would determine the appropriate methodology for calculating 
the Bank Holiday Charge in advance of each applicable Holiday. 
Potential methodologies for calculating the Bank Holiday Charge 
include, for example, time scaling of the VaR charge \6\ or application 
of stress scenarios that cover potential market price risk exposure 
that may not be appropriately covered by scaling the VaR charge. NSCC 
would establish a methodology for calculating each Bank Holiday Charge 
that would take into consideration the market conditions prevailing at 
that time in order to permit NSCC to calculate a Bank Holiday Charge 
that appropriately estimates the risk that may be presented to NSCC on 
the applicable Holiday, when Members' Required Deposit cannot be 
collected. The Bank Holiday Charge would represent a percentage 
increase of the volatility charge on the business day prior to the 
Holiday, and such percentage increase applies uniformly to all Members. 
This means that if the Bank Holiday Charge is levied, the same 
methodology (i.e., formula) is applied to all Members (that is, the 
Bank Holiday Charge is not a set dollar amount applied to all Members).
    Members would be notified of the applicable methodology by an 
Important Notice issued no later than 10 business days prior to the 
application the Bank Holiday Charge, and the charge is collected on the 
business day prior to the applicable Holiday. The Bank Holiday Charge 
is removed from the Required Deposit on the business day following the 
Holiday.
[GRAPHIC] [TIFF OMITTED] TN15SE16.009

2. Statutory Basis
    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to assure the safeguarding of 
securities and funds that are within the custody or control of the 
clearing agency.\7\ Rule 17Ad-22(b)(1) under the Act requires a 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to measure its credit 
exposures to its participants at least once a day and limit its 
exposures to potential losses from defaults by its participants under 
normal market conditions, so that the operations of the clearing agency 
would not be disrupted and non-defaulting participants would not be 
exposed to losses that they cannot anticipate or control.\8\ Rule 17Ad-
22(b)(2) under the Act requires a clearing agency to maintain and 
enforce written policies and procedures reasonably designed to use 
margin requirements to limit its credit exposures to participants under 
normal market conditions.\9\
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 17 CFR 240.17Ad-22(b)(1).
    \9\ 17 CFR 240.17Ad-22(b)(2).
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    By incorporating the Backtesting Charge and the Bank Holiday Charge 
into the NSCC Rules, the proposed change addresses exposure that could 
subject NSCC to potential losses under normal market conditions in the 
event that a Member defaults. Specifically, the proposed rule change 
seeks to remedy potential situations that are described above where 
NSCC could be undermargined by requiring additional margin. Therefore, 
NSCC believes the

[[Page 63514]]

proposed rule change enhances the safeguarding of securities and funds 
that are in the custody or control of NSCC, consistent with section 
17(b)(3)(F) of the Act.
    NSCC's Backtesting Charge is calculated and imposed to cover credit 
exposures estimated by NSCC based on historical backtesting 
deficiencies with the goal of maintaining each Member's Required 
Deposit above the 99 percent coverage threshold. This management of 
NSCC's credit exposures to Members is consistent with Rule 17Ad-
22(b)(1) under the Act. Further, the charge is part of the Members' 
Required Deposits designed to maintain the coverage of credit exposures 
at a confidence level of at least 99 percent, which limits NSCC's 
exposures to Members under normal market conditions. It therefore is 
also consistent with Rule 17Ad-22(b)(2) under the Act. The proposed 
Backtesting Charge seeks to address backtesting deficiencies that could 
potentially leave NSCC undermargined by using the risk-based 
methodology described above to limit its credit exposure to Members.
    NSCC's Bank Holiday Charge is calculated and imposed to cover 
credit exposures that results from market price moves that occur on a 
Holiday and are not incorporated in each Member's Required Deposit. 
This management of NSCC's credit exposures to Members is consistent 
with Rules 17Ad-22(b)(1) and 17Ad-22(b)(2) under the Act.

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

    NSCC does not believe that either the Backtesting Charge or the 
Bank Holiday Charge impose any burden on competition that is not 
necessary or appropriate.\10\ These charges are necessary for NSCC to 
limit its exposure to potential losses from defaults by Members.
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    \10\ 15 U.S.C. 78q-1(b)(3)(I).
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    The Backtesting Charge is imposed on each Member on an 
individualized basis in an amount reasonably calculated to maintain its 
Required Deposit above NSCC's 99 percent coverage threshold. NSCC 
employs reasonable methods to calculate and impose an individualized 
charge in an amount designed to maintain each impacted Member's future 
backtesting coverage above the 99 percent coverage threshold, including 
a reasonable buffer.
    Because the market price movements that occur on Holidays are 
related to the behavior of the market as a whole, the impact of such 
price movements on NSCC's risk is considered general market price risk. 
Therefore, the Bank Holiday Charge is imposed on all Members on a 
uniform basis in an amount reasonably calculated to mitigate the market 
price changes that could occur on a Holiday when banks are closed and 
NSCC is unable to collect Clearing Fund. The Bank Holiday Charge would 
represent a percentage increase of the volatility charge on the 
business day prior to the Holiday, and such percentage increase applies 
uniformly to all Members. This means that if the Bank Holiday Charge is 
levied, the same methodology (i.e., formula) is applied to all Members 
(that is, the Bank Holiday Charge is not a set dollar amount applied to 
all Members).
    NSCC believes any burden on competition imposed by the addition of 
these two charges to the NSCC Rules would be necessary and appropriate 
to limit NSCC's exposures to the risks being mitigated by such charges.

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

    NSCC has not received any written comments relating to this 
proposal. NSCC will notify the Commission of any written comments 
received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSCC-2016-004 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-2016-004. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 Web site 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 Web site (http://dtcc.com/legal/sec-rule-filings.aspx). All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NSCC-2016-004 and should be 
submitted on or before October 6, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-22157 Filed 9-14-16; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Notices 63511

Exchange notes that, with respect to the scheduled to start on October 3, 2016. business days between the hours of
change to require the use of the Pilot Therefore, the Commission hereby 10:00 a.m. and 3:00 p.m. Copies of such
Securities beginning thirty days prior to waives the 30-day operative delay and filing also will be available for
the start of the Pilot Period, the designates the proposed rule change to inspection and copying at the principal
proposed change reduces the number of be operative upon filing with the office of the Exchange. All comments
securities on which affected members Commission.29 received will be posted without change;
otherwise would have been required to At any time within 60 days of the the Commission does not edit personal
collect data pursuant to the Plan and filing of the proposed rule change, the identifying information from
Exchange Rule 11.27(b). In addition, the Commission summarily may submissions. You should submit only
proposed rule change applies equally to temporarily suspend such rule change if information that you wish to make
all similarly situated members. it appears to the Commission that such available publicly. All submissions
Therefore, the Exchange does not action is necessary or appropriate in the should refer to File Number SR–
believe that the proposed rule change public interest, for the protection of BatsBYX–2016–25 and should be
will result in any burden on investors, or otherwise in furtherance of submitted on or before October 6, 2016.
competition that is not necessary or the purposes of the Act.30 For the Commission, by the Division of
appropriate in furtherance of the IV. Solicitation of Comments Trading and Markets, pursuant to delegated
purposes of the Act. authority.31
Interested persons are invited to Brent J. Fields,
(C) Self-Regulatory Organization’s submit written data, views, and
Secretary.
Statement on Comments on the arguments concerning the foregoing,
Proposed Rule Change Received From [FR Doc. 2016–22145 Filed 9–14–16; 8:45 am]
including whether the proposed rule
Members, Participants or Others change is consistent with the Act. BILLING CODE 8011–01–P

Written comments were neither Comments may be submitted by any of
solicited nor received. the following methods:
SECURITIES AND EXCHANGE
III. Date of Effectiveness of the Electronic Comments COMMISSION
Proposed Rule Change and Timing for • Use the Commission’s Internet [Release No. 34–78808; File No. SR–NSCC–
Commission Action comment form (http://www.sec.gov/ 2016–004]
The foregoing rule change has become rules/sro.shtml); or
effective pursuant to Section 19(b)(3)(A) • Send an email to rule-comments@ Self-Regulatory Organizations;
sec.gov. Please include File Number SR– National Securities Clearing
of the Act 25 and Rule 19b–4(f)(6) 26
BatsBYX–2016–25 on the subject line. Corporation; Notice of Filing of
thereunder because the proposal does
Proposed Rule Change To Describe
not: (i) Significantly affect the Paper Comments the Backtesting Charge and the Bank
protection of investors or the public • Send paper comments in triplicate Holiday Charge That May Be Imposed
interest; (ii) impose any significant to Secretary, Securities and Exchange on Members
burden on competition; and (iii) by its Commission, 100 F Street NE.,
terms, become operative for 30 days Washington, DC 20549–1090. September 9, 2016.
from the date on which it was filed, or Pursuant to section 19(b)(1) of the
All submissions should refer to File
such shorter time as the Commission Securities Exchange Act of 1934
Number SR–BatsBYX–2016–25. This
may designate if consistent with the (‘‘Act’’),1 and Rule 19b–4 thereunder,2
file number should be included on the
protection of investors and the public notice is hereby given that on
subject line if email is used. To help the
interest. September 2, 2016, National Securities
Commission process and review your
A proposed rule change filed under Clearing Corporation (‘‘NSCC’’) filed
comments more efficiently, please use
Rule 19b–4(f)(6) 27 normally does not with the Securities and Exchange
only one method. The Commission will
become operative prior to 30 days after Commission (‘‘Commission’’) the
post all comments on the Commission’s
the date of the filing. However, pursuant proposed rule change as described in
Internet Web site (http://www.sec.gov/
to Rule 19b–4(f)(6)(iii),28 the Items I, II and III below, which Items
rules/sro.shtml). Copies of the have been prepared by the clearing
Commission may designate a shorter
submission, all subsequent agency. The Commission is publishing
time if such action is consistent with the
amendments, all written statements this notice to solicit comments on the
protection of investors and the public
with respect to the proposed rule proposed rule change from interested
interest. The Exchange has asked the
change that are filed with the persons.
Commission to waive the 30-day
Commission, and all written
operative delay so that so that the I. Clearing Agency’s Statement of the
communications relating to the
proposed rule change can become Terms of Substance of the Proposed
proposed rule change between the
operative on August 30, 2016. Rule Change
The Commission believes that Commission and any person, other than
waiving the 30-day operative delay is those that may be withheld from the The proposed rule change consists of
consistent with the protection of public in accordance with the amendments to the Rules and
investors and the public interest provisions of 5 U.S.C. 552, will be Procedures of NSCC (‘‘NSCC Rules’’) 3
because it will allow the Exchange to available for Web site viewing and in order to include two margin charges
implement the proposed rules printing in the Commission’s Public (the ‘‘Backtesting Charge’’ and ‘‘Bank
Reference Room, 100 F Street NE.,
sradovich on DSK3GMQ082PROD with NOTICES

immediately thereby preventing delays
in the implementation of the Plan. The Washington, DC 20549, on official 31 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
Commission notes that the Plan is 29 For purposes only of waiving the operative 2 17 CFR 240.19b–4.

delay for this proposal, the Commission has 3 The NSCC Rules are available at http://
25 15 U.S.C. 78s(b)(3)(A). considered the proposed rule’s impact on www.dtcc.com/legal/rules-and-procedures.
26 17 CFR 240.19b–4(f)(6).
efficiency, competition, and capital formation. See Capitalized terms used herein and not otherwise
27 17 CFR 240.19b–4(f)(6). 15 U.S.C. 78c(f). defined shall have the meaning assigned to such
28 17 CFR 240.19b–4(f)(6)(iii). 30 15 U.S.C. 78s(b)(3)(C). terms in the NSCC Rules.

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63512 Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Notices

Holiday Charge’’ as further described Corporation has observed deficiencies backtesting deficiencies. As a part of
below) that may be imposed on NSCC in the backtesting of such Member’s this investigation, NSCC pays particular
Members. The Backtesting Charge is Required Deposit over the prior 12- attention to Members with backtesting
assessed for those Members whose month period, such that NSCC deficiencies that bring the results for
portfolios experience backtesting determines the value-at-risk (‘‘VaR’’) that Member below the 99 percent
deficiencies over the prior 12-month margin charge being calculated for that confidence target (i.e., greater than two
period, as described further below. The Member may not fully address the backtesting deficiency days in a rolling
Backtesting Charge is calculated to projected liquidation losses estimated twelve-month period) to determine if
mitigate exposures to the Corporation from that Member’s settlement activity. there is an identifiable cause of repeat
caused by settlement risks that may not The Bank Holiday Charge addresses backtesting deficiencies. NSCC also
be adequately captured by the the risk exposure that occurs on evaluates whether multiple Members
Corporation’s portfolio volatility model. Holidays when NSCC is unable to may experience backtesting deficiencies
The Bank Holiday Charge is applied to collect Clearing Fund from its Members. for the same underlying reason.
all NSCC Members on the business day NSCC imposes the Bank Holiday Charge While multiple factors may contribute
prior to any day on which the U.S. on all Members to cover the additional to a Member’s backtesting deficiency,
equities markets are open for trading, day of exposure that is not NSCC has observed that some Members
but the Board of Governors of the contemplated in the prior day’s VaR with position increases after the
Federal Reserve System observes a charge. calculation of their Required Deposit
holiday and banks are closed may incur backtesting deficiencies due
(i) Background
(‘‘Holiday’’). The Bank Holiday Charge to the additional exposure that is not
addresses the risk exposure that a A. Backtesting and the Required Deposit mitigated until the collection of the
Member’s trading activity on the NSCC’s Clearing Fund addresses Required Deposit on the next business
applicable Holiday poses to the potential Member exposure through a day.
Corporation. The proposed rule change number of risk-based component B. Calculation of the Backtesting Charge
would amend NSCC Procedure XV to charges (as margin) calculated and
assessed daily. Each of the component The objective of the Backtesting
include the Backtesting Charge and
charges collectively constitute [sic] a Charge is to increase Required Deposits
Bank Holiday Charge as additional
Member’s Required Deposit. The for Members that are likely to
charges that may be added to its
objective of the Required Deposit is to experience backtesting deficiencies on
Members’ Clearing Fund Required
mitigate potential losses to NSCC the basis described above by an amount
Deposit, including the manner and
associated with liquidation of the sufficient to maintain such Member’s
circumstances in which NSCC
Member’s portfolio in the event that backtesting coverage above the 99
calculates and imposes such charges. percent confidence threshold. Because
NSCC is filing this proposed rule change NSCC ceases to act for a Member
(hereinafter referred to as a ‘‘default’’). the settlement activity and size of the
in order to provide transparency in the backtesting deficiencies varies among
NSCC Rules with respect to these NSCC determines Required Deposit
amounts using a risk-based margin impacted Members, NSCC must assess a
existing charges, as described in greater Backtesting Charge that is specific to
detail below. methodology that is intended to capture
market price risk. The methodology uses each impacted Member. To do so, NSCC
II. Clearing Agency’s Statement of the historical market moves to project or examines each impacted Member’s
Purpose of, and Statutory Basis for, the forecast the potential gains or losses on historical backtesting deficiencies
Proposed Rule Change the liquidation of a defaulting Member’s observed over the prior 12-month period
portfolio, assuming that a portfolio to identify the three largest backtesting
In its filing with the Commission, the
would take three days to liquidate or deficiencies that have occurred during
clearing agency included statements
hedge in normal market conditions. The that time. The presumptive Backtesting
concerning the purpose of and basis for
projected liquidation gains or losses are Charge amount equals that Member’s
the proposed rule change and discussed
used to determine the Member’s third largest historical backtesting
any comments it received on the
Required Deposit, which is calculated to deficiency, subject to adjustment as
proposed rule change. The text of these
cover projected liquidation losses at a further described below. NSCC believes
statements may be examined at the
99 percent confidence level. The that applying an additional margin
places specified in Item IV below. The
aggregate of all Members’ Required charge equal to the third largest
clearing agency has prepared
Deposits constitutes NSCC’s Clearing historical backtesting deficiency to a
summaries, set forth in sections A, B,
Fund, which NSCC would be able to Member’s Required Deposit would bring
and C below, of the most significant
access should a defaulting Member’s the Member’s historically-observed
aspects of such statements.
own Required Deposit be insufficient to backtesting coverage above the 99
(A) Clearing Agency’s Statement of the satisfy losses to NSCC caused by the percent target.5 If assessed, the resulting
Purpose of, and Statutory Basis for, the liquidation of that Member’s portfolio. Backtesting Charge is added to the
Proposed Rule Change NSCC employs daily backtesting to Required Deposit for such Member
determine the adequacy of each determined pursuant to NSCC’s risk-
1. Purpose
Member’s Required Deposit. NSCC based margining methodology, and is
The proposed rule change provides compares the Required Deposit 4 for imposed on a daily basis for a one-
transparency in the NSCC Rules with each Member with the simulated month period.
respect to the Backtesting Charge and
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liquidation gains/losses using the actual This charge is only applicable to those
the Bank Holiday Charge, two margin positions in the Member’s portfolio, and Members whose overall 12-month
charges that NSCC may temporarily the actual historical security returns.
impose on a Member as part of such NSCC investigates the cause(s) of any
5 Each occurrence of a backtesting deficiency

Member’s Required Deposit to the NSCC reduces a Member’s overall backtesting coverage by
0.4 percent (1 exception/250 observation days).
Clearing Fund. 4 For backtesting comparisons, NSCC uses the Accordingly, an increase equal to the third largest
NSCC may impose the Backtesting Required Deposit amount, without regard to the backtesting deficiency would bring backtesting
Charge on an NSCC Member when the actual collateral posted by the Member. coverage up to 99.2 percent.

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63514 Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Notices

proposed rule change enhances the behavior of the market as a whole, the Electronic Comments
safeguarding of securities and funds that impact of such price movements on • Use the Commission’s Internet
are in the custody or control of NSCC, NSCC’s risk is considered general comment form (http://www.sec.gov/
consistent with section 17(b)(3)(F) of the market price risk. Therefore, the Bank rules/sro.shtml); or
Act. Holiday Charge is imposed on all
• Send an email to rule-comments@
NSCC’s Backtesting Charge is Members on a uniform basis in an
calculated and imposed to cover credit sec.gov. Please include File Number SR–
amount reasonably calculated to
exposures estimated by NSCC based on NSCC–2016–004 on the subject line.
mitigate the market price changes that
historical backtesting deficiencies with could occur on a Holiday when banks Paper Comments
the goal of maintaining each Member’s are closed and NSCC is unable to collect
Required Deposit above the 99 percent • Send paper comments in triplicate
Clearing Fund. The Bank Holiday
coverage threshold. This management of to Secretary, Securities and Exchange
Charge would represent a percentage
NSCC’s credit exposures to Members is Commission, 100 F Street NE.,
increase of the volatility charge on the
consistent with Rule 17Ad–22(b)(1) Washington, DC 20549.
business day prior to the Holiday, and
under the Act. Further, the charge is such percentage increase applies All submissions should refer to File
part of the Members’ Required Deposits uniformly to all Members. This means Number SR–NSCC–2016–004. This file
designed to maintain the coverage of that if the Bank Holiday Charge is number should be included on the
credit exposures at a confidence level of levied, the same methodology (i.e., subject line if email is used. To help the
at least 99 percent, which limits NSCC’s formula) is applied to all Members (that Commission process and review your
exposures to Members under normal is, the Bank Holiday Charge is not a set comments more efficiently, please use
market conditions. It therefore is also dollar amount applied to all Members). only one method. The Commission will
consistent with Rule 17Ad–22(b)(2) post all comments on the Commission’s
NSCC believes any burden on
under the Act. The proposed Internet Web site (http://www.sec.gov/
competition imposed by the addition of
Backtesting Charge seeks to address rules/sro.shtml). Copies of the
these two charges to the NSCC Rules
backtesting deficiencies that could submission, all subsequent
would be necessary and appropriate to
potentially leave NSCC undermargined amendments, all written statements
limit NSCC’s exposures to the risks
by using the risk-based methodology with respect to the proposed rule
being mitigated by such charges.
described above to limit its credit change that are filed with the
exposure to Members. (C) Clearing Agency’s Statement on Commission, and all written
NSCC’s Bank Holiday Charge is Comments on the Proposed Rule communications relating to the
calculated and imposed to cover credit Change Received From Members, proposed rule change between the
exposures that results from market price Participants, or Others Commission and any person, other than
moves that occur on a Holiday and are those that may be withheld from the
not incorporated in each Member’s NSCC has not received any written public in accordance with the
Required Deposit. This management of comments relating to this proposal. provisions of 5 U.S.C. 552, will be
NSCC’s credit exposures to Members is NSCC will notify the Commission of any available for Web site viewing and
consistent with Rules 17Ad–22(b)(1) written comments received. printing in the Commission’s Public
and 17Ad–22(b)(2) under the Act. III. Date of Effectiveness of the Reference Room, 100 F Street NE.,
(B) Clearing Agency’s Statement on Proposed Rule Change, and Timing for Washington, DC 20549 on official
Burden on Competition Commission Action business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
NSCC does not believe that either the Within 45 days of the date of filing also will be available for
Backtesting Charge or the Bank Holiday publication of this notice in the Federal inspection and copying at the principal
Charge impose any burden on Register or within such longer period office of NSCC and on DTCC’s Web site
competition that is not necessary or up to 90 days (i) as the Commission may (http://dtcc.com/legal/sec-rule-
appropriate.10 These charges are designate if it finds such longer period filings.aspx). All comments received
necessary for NSCC to limit its exposure to be appropriate and publishes its will be posted without change; the
to potential losses from defaults by reasons for so finding or (ii) as to which Commission does not edit personal
Members. the self-regulatory organization identifying information from
The Backtesting Charge is imposed on consents, the Commission will: submissions. You should submit only
each Member on an individualized basis information that you wish to make
(A) By order approve or disapprove
in an amount reasonably calculated to available publicly. All submissions
such proposed rule change, or
maintain its Required Deposit above should refer to File Number SR–NSCC–
NSCC’s 99 percent coverage threshold. (B) institute proceedings to determine
whether the proposed rule change 2016–004 and should be submitted on
NSCC employs reasonable methods to or before October 6, 2016.
calculate and impose an individualized should be disapproved.
charge in an amount designed to For the Commission, by the Division of
IV. Solicitation of Comments Trading and Markets, pursuant to delegated
maintain each impacted Member’s
Interested persons are invited to authority.11
future backtesting coverage above the 99
percent coverage threshold, including a submit written data, views and Brent J. Fields,
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reasonable buffer. arguments concerning the foregoing, Secretary.
Because the market price movements including whether the proposed rule [FR Doc. 2016–22157 Filed 9–14–16; 8:45 am]
that occur on Holidays are related to the change is consistent with the Act. BILLING CODE 8011–01–P
Comments may be submitted by any of
10 15 U.S.C. 78q–1(b)(3)(I). the following methods: 11 17 CFR 200.30–3(a)(12).

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Document Created: 2018-02-09 13:18:01
Document Modified: 2018-02-09 13:18:01
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 63511