82 FR 21863 - Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Describe the Illiquid Charge That May Be Imposed on Members
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 89 (May 10, 2017)
Federal Register Volume 82, Issue 89 (May 10, 2017)
| Page Range | 21863-21866 | |
| FR Document | 2017-09425 |
[Federal Register Volume 82, Number 89 (Wednesday, May 10, 2017)] [Notices] [Pages 21863-21866] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-09425] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80597; File No. SR-NSCC-2017-001] Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Describe the Illiquid Charge That May Be Imposed on Members May 4, 2017. On March 13, 2017, National Securities Clearing Corporation (``NSCC'') filed with the Securities and Exchange Commission (``Commission'') proposed rule change SR-NSCC-2017-001, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The proposed rule change was published for comment in the Federal Register on March 22, 2017.\3\ The Commission did not receive any comment letters on the proposed rule change. For the reasons discussed below, the Commission is granting approval of the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No. 80260 (March 16, 2017), 82 FR 14781 (March 22, 2017) (SR-NSCC-2017-001) (``Notice''). --------------------------------------------------------------------------- I. Description of the Proposed Rule Change NSCC proposes to amend its Rules & Procedures (``Rules'') \4\ in order to provide transparency to an existing margin charge (i.e., the ``Illiquid Charge'') and to codify NSCC's current practices with respect to the assessment and collection of the Illiquid Charge, as described below.\5\ Separately, NSCC also proposes to amend Procedure XV of the Rules to define the ``Market Maker Domination Charge,'' also described below. --------------------------------------------------------------------------- \4\ Available at http://www.dtcc.com/en/legal/rules-and-procedures. \5\ Specifically, NSCC proposes to amend Rule 1 (Definitions and Descriptions) to add certain defined terms associated with the Illiquid Charge, and amend Procedure XV (Clearing Fund Formula and Other Matters) to clarify the circumstances and manner in which NSCC calculates and imposes the Illiquid Charge. --------------------------------------------------------------------------- A. The Illiquid Charge NSCC states that it designed the Illiquid Charge to mitigate the market risk that NSCC faces when liquidating securities that lack marketability, based on insufficient access to a trading venue, and may have low and volatile share prices (``Illiquid Securities''),\6\ following a member default.\7\ In such a situation, the liquidation of Illiquid Securities could be difficult or delayed due to a lack of interest in the securities or limitations on the share price of the securities.\8\ --------------------------------------------------------------------------- \6\ More specifically, NSCC proposes to define Illiquid Security to mean a security, other than a family-issued security as defined in Procedure XV of the Rules, that either (i) is not traded on or subject to the rules of a national securities exchange registered under the Act, or (ii) is an OTC Bulletin Board or OTC Link issue. \7\ Notice, 82 FR at 14781. \8\ Id. --------------------------------------------------------------------------- NSCC calculates an Illiquid Charge for each net unsettled position in an Illiquid Security (i.e., an ``Illiquid Position'') that exceeds applicable volume thresholds. Following is a description of (i) the volume thresholds that must be met in order for the Illiquid Charge to be applied, (ii) the methodology for calculating the Illiquid Charge, and (iii) the exceptions to and application of the Illiquid Charge. 1. Net Buy Illiquid Positions and Net Sell Illiquid Positions Depending on whether the Illiquid Positon is a net buy or a net sell position, NSCC applies different volume thresholds and calculation methods for establishing the Illiquid Charge. The purpose of this is to address the different risk profiles presented by such net buy and net sell positions.\9\ --------------------------------------------------------------------------- \9\ In the event of a Member default, NSCC would complete the liquidation of an Illiquid Position by buying or selling that position into the market. Notice, 82 FR at 14783. According to NSCC, the different risk profiles of net buy positions and net sell positions are based on, in part, the difference in the potential responsiveness of prices change to quantity that may occur when NSCC is liquidating a net buy position in an Illiquid Security, compared to when it is liquidating a net sell position in an Illiquid Security. Id. --------------------------------------------------------------------------- a. Net Buy Illiquid Positions The Illiquid Charge only applies to a member's net buy Illiquid Position if the position meets a specific volume threshold. For an NSCC member with a strong credit rating, the net buy Illiquid Position must meet a volume threshold of greater than 100 million shares.\10\ For [[Page 21864]] an NSCC member with a weak credit rating, the net buy Illiquid Positon must meet a volume threshold of greater than 10 million shares.\11\ If the volume threshold is met, the net buy position in the Illiquid Securities is considered an Illiquid Position and is subject to the Illiquid Charge. --------------------------------------------------------------------------- \10\ Credit ratings are established through NSCC's credit risk rating matrix (``CRRM''). See Rule 2B, Section 4, supra note 4; see also Securities Exchange Act Release No. 80381 (April 5, 2017), 82 FR 17475 (April 11, 2017) (SR-NSCC-2017-002) (NSCC proposed rule change to modify the CRRM formula). The CRRM applies a 7-point rating system, with ``1'' being the strongest rating and ``7'' being the weakest rating. Id. A CRRM credit rating of 1-4 would be a stronger credit rating, while a CRRM credit rating of 5-7 would be a weaker credit rating. Id. \11\ Members with a stronger CRRM rating would be assessed an Illiquid Charge on a net buy Illiquid Position at a higher volume threshold because NSCC believes these members pose a lower risk of default. Notice, 82 FR at 14783. Meanwhile, members with a weaker CRRM rating present a heightened credit risk to NSCC or have demonstrated a higher risk related to their ability to meet settlement. Id. --------------------------------------------------------------------------- In addition, the Illiquid Charge only applies to net buy Illiquid Positions in Illiquid Securities that have a share price below $0.01. If a transaction in any security, including an Illiquid Security, with a share price below $0.01 is entered into NSCC's Continuous Net Settlement system or Balance Order Accounting Operation,\12\ NSCC rounds up the price of the security to $0.01. Therefore, when a member holds a buy position in a sub-penny security, NSCC records the position's value at a higher price than the actual per share price of the position. The difference may reduce the member's required fund deposit,\13\ particularly for a large quantity of buy positions in a sub-penny security. --------------------------------------------------------------------------- \12\ NSCC processed guaranteed trades through the Continuous Net Settlement system if the underlying security is freely transferable. NSCC processed guaranteed trades through the Balance Order Accounting Operation when the underlying security is subject to a restriction such as Reg. S or Reg. 144A. See Rule 1, supra note 4. \13\ The required fund deposit is a mutualized deposit made by a member to NSCC to be used in the event of a member default. See Rule 4, Section 1, supra note 4. --------------------------------------------------------------------------- To address this risk, NSCC states that it calculates the Illiquid Charge for net buy Illiquid Positions by multiplying the aggregate quantity of shares in such positions by $0.01.\14\ NSCC assesses and collects the resulting amounts as the Illiquid Charge component of affected members' required fund deposit.\15\ --------------------------------------------------------------------------- \14\ Notice, 82 FR at 14783. \15\ Id. --------------------------------------------------------------------------- b. Net Sell Illiquid Positions The Illiquid Charge only applies to a member's net sell Illiquid Position if the position meets a specific volume threshold. To determine the volume threshold, NSCC first offsets the quantity of shares in the member's net sell Illiquid Position against the number of shares of the same Illiquid Security held by the member at The Depository Trust Company (``DTC inventory offset'').\16\ Next, NSCC determines the applicable volume threshold for the net sell Illiquid Position based on (i) the percentage of the average daily volume (``ADV'') \17\ of the underlying Illiquid Securities, (ii) the member's credit rating, and, in some cases, (iii) the member's excess net capital (``ENC''). More specifically, for an NSCC member with a strong credit rating (i.e., a CRRM rating of 1-4), the net sell Illiquid Position must meet a volume threshold of 1 million shares, when the net sell Illiquid Position is greater than or equal to 25 percent of the ADV. For an NSCC member with a weak credit rating (i.e., a CRRM rating of 5-7), the net sell Illiquid Position must meet a volume threshold of 500,000 shares, when the net sell Illiquid Position is greater than or equal to 25 percent of the ADV and the member's ENC is greater than $10 million. However, the net sell Illiquid Position need only meet a volume threshold of 100,000 shares, if an NSCC member has a weak credit rating (i.e., a CRRM rating of 5-7), and the net sell Illiquid Position is greater than or equal to 25 percent of the ADV, and the member's ENC is less than or equal to $10 million. A member may not meet the applicable volume thresholds after applying the DTC inventory offset, and, therefore, would not be subject to the Illiquid Charge. --------------------------------------------------------------------------- \16\ DTC is a central depository where NSCC-traded securities are held. The DTC inventory offset does not apply to members with the weakest CRRM rating (i.e., a 7). See Rule 2B, Section 4, supra note 4; Notice, 82 FR at 14783. \17\ NSCC states that ``ADV'' is the average daily volume over the most recent twenty business days as determined by NSCC. Notice, 82 FR at 14783. --------------------------------------------------------------------------- If the applicable volume threshold is met, the net sell Illiquid Position is subject to the Illiquid Charge. To calculate the Illiquid Charge for net sell Illiquid Positions, NSCC considers the Current Market Price \18\ of the subject Illiquid Security and the quantity of shares in such position compared to the ADV of that Illiquid Security: --------------------------------------------------------------------------- \18\ The term ``Current Market Price'' is defined in Rule 1 and is generally the most recent closing price of the security. Supra note 4. --------------------------------------------------------------------------- (A) If the Illiquid Position has a Current Market Price equal to or less than $1.00, NSCC calculates the Illiquid Charge as the product of the aggregate quantity of shares in the Illiquid Position and either (i) the highest market price of the Illiquid Security during the preceding 20 trading days (``One Month High Price''),\19\ or (ii) the Current Market Price of the Illiquid Security multiplied by a factor between 2 and 10, depending on the market price.\20\ --------------------------------------------------------------------------- \19\ The ``One Month High Price'' means the highest of all NSCC observed market prices over the most recent 20 trading day period for purposes of the Illiquid Charge. Notice, 82 FR at 14783. \20\ Generally, the factor applied would be 10 where the market price is less than $0.10; the factor applied would be 5 where the market price is between $0.10 and $0.20; the factor applied would be 2 where the market price is between $0.20 and $1.00. Where the market price is greater than $1.00, a $0.50 price increment is applied. Id. --------------------------------------------------------------------------- (B) If the Illiquid Position has a Current Market Price that is greater than $1.00, NSCC calculates the Illiquid Charge as the product of the aggregate quantity of shares in the Illiquid Position and either (i) the One Month High Price, or (ii) the Current Market Price of the Illiquid Security rounded up to the next $0.50 increment. In determining whether to use the One Month High Price or the Current Market Price of the Illiquid Security to calculate the Illiquid Charge, NSCC compares the percentage of the ADV to the share quantity in the Illiquid Position. If the quantity of shares in the Illiquid Position is less than 100 percent of the ADV, but greater than or equal to 25 percent of the ADV, then the calculation uses the lesser of the One Month High Price or the Current Market Price of the Illiquid Securities (rounded up to the next $0.50 increment, if applicable). If the quantity of shares in the Illiquid Position is greater than or equal to 100 percent of the ADV, then the calculation uses the greater of the One Month High Price or the Current Market Price of the Illiquid Security (rounded up to the next $0.50 increment, if applicable). Furthermore, depending on the result of the calculation described above, the Illiquid Charge would remain subject to a minimum price per share, which would not be less than $0.01. Therefore, when calculating the Illiquid Charge, the One Month High Price or the Current Market Price of the Illiquid Security is substituted by the minimum price per share if the One Month High Price or the Current Market Price, as applicable, is below the minimum price per share. 2. Exceptions and Exclusions From the Illiquid Charge NSCC states that, in order to avoid duplicate margin charges, it does not apply the Illiquid Charge when a greater Market Maker Domination Charge (``MMDC'') charge is also applicable to the same Illiquid Positions.\21\ The MMDC applies to a position in a security that is greater than 40 percent of the overall unsettled long position in [[Page 21865]] that security, if such position is held by the Market Maker in that security.\22\ --------------------------------------------------------------------------- \21\ Notice, 82 FR at 14784. \22\ For purposes of calculating the MMDC, the overall unsettled long position is calculated as the sum of each member's net long position. Application and calculation of the MMDC is described in Procedure XV of the Rules, Sections I(A)(1)(d) and I(A)(2)(c). Supra note 4. --------------------------------------------------------------------------- Similarly, NSCC proposes to exclude family-issued securities from the definition of ``Illiquid Security.'' \23\ NSCC believes that family-issued securities have a different risk profile than other illiquid securities that is better addressed through a separate margin charge. --------------------------------------------------------------------------- \23\ NSCC defines family-issued securities as securities that were issued by either that member or by an affiliate of that member. Procedure XV, Section I(B)(1), supra note 4. --------------------------------------------------------------------------- B. The Market Maker Domination Charge Change Separate from the proposed changes related to the Illiquid Charge, NSCC would amend the Rules to define the term ``Market Maker Domination Charge'' in Procedure XV, Section I(A)(1)(d) of the Rules and use the defined term in Section I(A)(2)(c) of the Rules. NSCC believes that this change would improve clarity and create ease of reference in the Rules.\24\ --------------------------------------------------------------------------- \24\ Supra note 4. --------------------------------------------------------------------------- II. Discussion and Commission Findings Section 19(b)(2)(C) of the Act \25\ directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and rules and regulations thereunder applicable to such organization. The Commission believes the proposal is consistent with Act, specifically Section 17A(b)(3)(F) of the Act and Rules 17Ad-22(e)(1), (e)(4)(i), and (e)(6)(v) \26\ under the Act, as discussed below. --------------------------------------------------------------------------- \25\ 15 U.S.C. 78s(b)(2)(C). \26\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(e)(1); 17 CFR 240.17Ad-22(e)(4)(i); 17 CFR 240.17Ad-22(e)(6). --------------------------------------------------------------------------- A. Consistency With Section 17A(b)(3)(F) Section 17A(b)(3)(F) of the Act, requires, in part, that NSCC's Rules be designed to assure the safeguarding of securities and funds that are within the custody or control of the clearing agency and to promote the prompt and accurate clearance and settlement of securities transactions.\27\ As described above, the Illiquid Charge could help protect NSCC from potential losses in the event that a member defaults. Specifically, the Illiquid Charge is calculated and collected to help mitigate the potential costs associated with NSCC's potential difficulties or delays in liquidating Illiquid Securities, due to the illiquid nature of such securities, following a member default. By enabling NSCC to better assess and collect required fund deposits in consideration of members' Illiquid Positions, the Commission believes that the proposed changes related to the Illiquid Charge would help promote the safeguarding of securities and funds that are within NSCC's custody or control, consistent with the requirements of Section 17(b)(3)(F) of the Act.\28\ --------------------------------------------------------------------------- \27\ 15 U.S.C. 78q-1(b)(3)(F). \28\ Id. --------------------------------------------------------------------------- The Commission also finds that the proposed rule change pertaining to the Market Maker Domination Charge is consistent with Section 17A(b)(3)(F) of the Act.\29\ As described above, NSCC proposes to add to its Rules a definition of the Market Maker Domination Charge. This change could make the Rules more clear for members that rely on them, enabling members to more easily and promptly rely on the Rules, which helpssupport NSCC's prompt and accurate clearance and settlement of securities transactions made by members. Therefore, the Commission believes that the proposed rule change related to the Market Maker Domination Charge is consistent with Section 17A(b)(3)(F) of the Act.\30\ --------------------------------------------------------------------------- \29\ Id. \30\ Id. --------------------------------------------------------------------------- B. Consistency With Rule 17Ad-22(e)(1) Rule 17Ad-22(e)(1) under the Act requires, in part, a clearing agency to ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [p]rovide for a well- founded, clear, transparent and enforceable legal basis for each aspect of its activities.'' \31\ As described above, NSCC proposes to define the term ``Market Maker Domination Charge'' Procedure XV, Section I(A)(1)(d) of the Rules.\32\ The Commission believes that this proposed change could make the Rules more clear and transparent for members that rely on them, consistent with Rule 17Ad-22(e)(1). --------------------------------------------------------------------------- \31\ 17 CFR 240.17Ad-22(e)(1). \32\ Supra note 4. --------------------------------------------------------------------------- C. Consistency With Rule 17Ad-22(e)(4)(i) Rule 17Ad-22(e)(4)(i) under the Act requires a clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to members and those exposures arising from its payment, clearing, and settlement processes, including by maintaining sufficient financial resources to cover its credit exposure to each member fully with a high degree of confidence.\33\ As described above, the Illiquid Charge is calculated and imposed based on the amount and nature of Illiquid Securities in each member's portfolio, and in consideration of the members' credit rating. In doing so, the Illiquid Charge is designed to help obtain sufficient financial resources to help cover the credit exposures, with a high degree of confidence, presented by members that maintain Illiquid Positions. Therefore, the Commission believes that the proposed changes related to the Illiquid Charge are consistent with Rule 17Ad-22(e)(4)(i) under the Act.\34\ --------------------------------------------------------------------------- \33\ 17 CFR 240.17Ad-22(e)(4)(i). \34\ Id. --------------------------------------------------------------------------- D. Consistency With Rule 17Ad-22(e)(6)(v) Rule 17Ad-22(e)(6)(v) under the Act requires, in part, NSCC to establish, implement, maintain and enforce written policies and procedures reasonably designed to cover its credit exposures to its members by establishing a risk-based margin system that, at a minimum, uses an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products.\35\ As described above, the Illiquid Charge is a component of the required fund deposits that NSCC calculates and collects using a risk-based margin methodology that is designed to help maintain the coverage of NSCC's credit exposures to its members at a confidence level of at least 99 percent. The Illiquid Charge is calculated to address the unique risk characteristics presented by Illiquid Securities, specifically their lack of marketability and their low and volatile share prices, and in consideration of the credit rating of the member holding the Illiquid Position. Therefore, the Commission believes that the proposed changes related to the Illiquid Charge are consistent with Rule 17Ad-22(e)(6)(v) under the Act.\36\ --------------------------------------------------------------------------- \35\ 17 CFR 240.17Ad-22(e)(6)(v). \36\ Id. --------------------------------------------------------------------------- III. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act, in particular the requirements of [[Page 21866]] Section 17A of the Act \37\ and the rules and regulations thereunder. --------------------------------------------------------------------------- \37\ 15 U.S.C. 78q-1. --------------------------------------------------------------------------- It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that proposed rule change SR-NSCC-2017-001 be, and hereby is, Approved.\38\ --------------------------------------------------------------------------- \38\ In approving the proposed rule change, the Commission considered the proposals' impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\39\ --------------------------------------------------------------------------- \39\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-09425 Filed 5-9-17; 8:45 am] BILLING CODE 8011-01-P
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to determine whether the proposed rule For the Commission, by the Division of A. The Illiquid Charge
change should be approved or Trading and Markets, pursuant to delegated
authority.17 NSCC states that it designed the
disapproved. Illiquid Charge to mitigate the market
Eduardo A. Aleman,
IV. Solicitation of Comments risk that NSCC faces when liquidating
Assistant Secretary. securities that lack marketability, based
Interested persons are invited to [FR Doc. 2017–09422 Filed 5–9–17; 8:45 am] on insufficient access to a trading
submit written data, views, and BILLING CODE 8011–01–P venue, and may have low and volatile
arguments concerning the foregoing, share prices (‘‘Illiquid Securities’’),6
including whether the proposed rule following a member default.7 In such a
change is consistent with the Act. SECURITIES AND EXCHANGE situation, the liquidation of Illiquid
Comments may be submitted by any of COMMISSION Securities could be difficult or delayed
the following methods: due to a lack of interest in the securities
[Release No. 34–80597; File No. SR–NSCC– or limitations on the share price of the
Electronic Comments 2017–001] securities.8
NSCC calculates an Illiquid Charge for
• Use the Commission’s Internet Self-Regulatory Organizations; each net unsettled position in an
comment form (http://www.sec.gov/ National Securities Clearing Illiquid Security (i.e., an ‘‘Illiquid
rules/sro.shtml); or Corporation; Order Approving Position’’) that exceeds applicable
• Send an email to rule-comments@ Proposed Rule Change To Describe volume thresholds. Following is a
sec.gov. Please include File Number SR– the Illiquid Charge That May Be description of (i) the volume thresholds
NASDAQ–2017–042 on the subject line. Imposed on Members that must be met in order for the Illiquid
May 4, 2017.
Charge to be applied, (ii) the
Paper Comments
methodology for calculating the Illiquid
• Send paper comments in triplicate On March 13, 2017, National Charge, and (iii) the exceptions to and
to Brent J. Fields, Secretary, Securities Securities Clearing Corporation application of the Illiquid Charge.
(‘‘NSCC’’) filed with the Securities and
and Exchange Commission, 100 F Street 1. Net Buy Illiquid Positions and Net
Exchange Commission (‘‘Commission’’)
NE., Washington, DC 20549–1090. Sell Illiquid Positions
proposed rule change SR–NSCC–2017–
All submissions should refer to File 001, pursuant to Section 19(b)(1) of the Depending on whether the Illiquid
Number SR–NASDAQ–2017–042. This Securities Exchange Act of 1934 Positon is a net buy or a net sell
file number should be included on the (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 position, NSCC applies different volume
subject line if email is used. To help the The proposed rule change was thresholds and calculation methods for
Commission process and review your published for comment in the Federal establishing the Illiquid Charge. The
comments more efficiently, please use Register on March 22, 2017.3 The purpose of this is to address the
only one method. The Commission will Commission did not receive any different risk profiles presented by such
post all comments on the Commission’s comment letters on the proposed rule net buy and net sell positions.9
Internet Web site (http://www.sec.gov/ change. For the reasons discussed
below, the Commission is granting a. Net Buy Illiquid Positions
rules/sro.shtml). Copies of the
submission, all subsequent approval of the proposed rule change. The Illiquid Charge only applies to a
amendments, all written statements member’s net buy Illiquid Position if the
I. Description of the Proposed Rule position meets a specific volume
with respect to the proposed rule Change
change that are filed with the threshold. For an NSCC member with a
Commission, and all written NSCC proposes to amend its Rules & strong credit rating, the net buy Illiquid
communications relating to the Procedures (‘‘Rules’’) 4 in order to Position must meet a volume threshold
provide transparency to an existing of greater than 100 million shares.10 For
proposed rule change between the
Commission and any person, other than margin charge (i.e., the ‘‘Illiquid 6 More specifically, NSCC proposes to define
those that may be withheld from the Charge’’) and to codify NSCC’s current Illiquid Security to mean a security, other than a
public in accordance with the practices with respect to the assessment family-issued security as defined in Procedure XV
provisions of 5 U.S.C. 552, will be and collection of the Illiquid Charge, as of the Rules, that either (i) is not traded on or
described below.5 Separately, NSCC subject to the rules of a national securities exchange
available for Web site viewing and registered under the Act, or (ii) is an OTC Bulletin
printing in the Commission’s Public also proposes to amend Procedure XV of Board or OTC Link issue.
Reference Room, 100 F Street NE., the Rules to define the ‘‘Market Maker 7 Notice, 82 FR at 14781.
Washington, DC 20549, on official Domination Charge,’’ also described 8 Id.
business days between the hours of below. 9 In the event of a Member default, NSCC would
complete the liquidation of an Illiquid Position by
10:00 a.m. and 3:00 p.m. Copies of the buying or selling that position into the market.
17 17 CFR 200.30–3(a)(12).
filing also will be available for 1 15
Notice, 82 FR at 14783. According to NSCC, the
U.S.C. 78s(b)(1).
inspection and copying at the principal 2 17 CFR 240.19b–4.
different risk profiles of net buy positions and net
office of the Exchange. All comments sell positions are based on, in part, the difference
3 See Securities Exchange Act Release No. 80260
in the potential responsiveness of prices change to
received will be posted without change; (March 16, 2017), 82 FR 14781 (March 22, 2017) quantity that may occur when NSCC is liquidating
the Commission does not edit personal (SR–NSCC–2017–001) (‘‘Notice’’). a net buy position in an Illiquid Security, compared
jstallworth on DSK7TPTVN1PROD with NOTICES
4 Available at http://www.dtcc.com/en/legal/ to when it is liquidating a net sell position in an
identifying information from
rules-and-procedures. Illiquid Security. Id.
submissions. You should submit only 5 Specifically, NSCC proposes to amend Rule 1 10 Credit ratings are established through NSCC’s
information that you wish to make (Definitions and Descriptions) to add certain credit risk rating matrix (‘‘CRRM’’). See Rule 2B,
available publicly. All submissions defined terms associated with the Illiquid Charge, Section 4, supra note 4; see also Securities
should refer to File Number SR– and amend Procedure XV (Clearing Fund Formula Exchange Act Release No. 80381 (April 5, 2017), 82
and Other Matters) to clarify the circumstances and FR 17475 (April 11, 2017) (SR–NSCC–2017–002)
NASDAQ–2017–042 and should be manner in which NSCC calculates and imposes the (NSCC proposed rule change to modify the CRRM
submitted on or before May 31, 2017. Illiquid Charge. Continued
VerDate Sep<11>2014 15:21 May 09, 2017 Jkt 241001 PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 E:\FR\FM\10MYN1.SGM 10MYN1](https://thefederalregister.org/doc/82_FR_21952/page/1.svg)
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that security, if such position is held by costs associated with NSCC’s potential those exposures arising from its
the Market Maker in that security.22 difficulties or delays in liquidating payment, clearing, and settlement
Similarly, NSCC proposes to exclude Illiquid Securities, due to the illiquid processes, including by maintaining
family-issued securities from the nature of such securities, following a sufficient financial resources to cover its
definition of ‘‘Illiquid Security.’’ 23 member default. By enabling NSCC to credit exposure to each member fully
NSCC believes that family-issued better assess and collect required fund with a high degree of confidence.33 As
securities have a different risk profile deposits in consideration of members’ described above, the Illiquid Charge is
than other illiquid securities that is Illiquid Positions, the Commission calculated and imposed based on the
better addressed through a separate believes that the proposed changes amount and nature of Illiquid Securities
margin charge. related to the Illiquid Charge would in each member’s portfolio, and in
B. The Market Maker Domination help promote the safeguarding of consideration of the members’ credit
Charge Change securities and funds that are within rating. In doing so, the Illiquid Charge
NSCC’s custody or control, consistent
Separate from the proposed changes is designed to help obtain sufficient
with the requirements of Section
related to the Illiquid Charge, NSCC financial resources to help cover the
17(b)(3)(F) of the Act.28
would amend the Rules to define the The Commission also finds that the credit exposures, with a high degree of
term ‘‘Market Maker Domination proposed rule change pertaining to the confidence, presented by members that
Charge’’ in Procedure XV, Section Market Maker Domination Charge is maintain Illiquid Positions. Therefore,
I(A)(1)(d) of the Rules and use the consistent with Section 17A(b)(3)(F) of the Commission believes that the
defined term in Section I(A)(2)(c) of the the Act.29 As described above, NSCC proposed changes related to the Illiquid
Rules. NSCC believes that this change proposes to add to its Rules a definition Charge are consistent with Rule 17Ad–
would improve clarity and create ease of of the Market Maker Domination 22(e)(4)(i) under the Act.34
reference in the Rules.24 Charge. This change could make the D. Consistency With Rule 17Ad–
II. Discussion and Commission Rules more clear for members that rely 22(e)(6)(v)
Findings on them, enabling members to more
Section 19(b)(2)(C) of the Act 25 easily and promptly rely on the Rules, Rule 17Ad–22(e)(6)(v) under the Act
directs the Commission to approve a which helpssupport NSCC’s prompt and requires, in part, NSCC to establish,
proposed rule change of a self- accurate clearance and settlement of implement, maintain and enforce
regulatory organization if it finds that securities transactions made by written policies and procedures
such proposed rule change is consistent members. Therefore, the Commission reasonably designed to cover its credit
with the requirements of the Act and believes that the proposed rule change exposures to its members by
rules and regulations thereunder related to the Market Maker Domination establishing a risk-based margin system
applicable to such organization. The Charge is consistent with Section that, at a minimum, uses an appropriate
Commission believes the proposal is 17A(b)(3)(F) of the Act.30 method for measuring credit exposure
consistent with Act, specifically Section B. Consistency With Rule 17Ad–22(e)(1) that accounts for relevant product risk
17A(b)(3)(F) of the Act and Rules 17Ad– factors and portfolio effects across
22(e)(1), (e)(4)(i), and (e)(6)(v) 26 under Rule 17Ad–22(e)(1) under the Act
requires, in part, a clearing agency to products.35 As described above, the
the Act, as discussed below. Illiquid Charge is a component of the
‘‘establish, implement, maintain and
A. Consistency With Section enforce written policies and procedures required fund deposits that NSCC
17A(b)(3)(F) reasonably designed to . . . [p]rovide calculates and collects using a risk-
Section 17A(b)(3)(F) of the Act, for a well-founded, clear, transparent based margin methodology that is
requires, in part, that NSCC’s Rules be and enforceable legal basis for each designed to help maintain the coverage
designed to assure the safeguarding of aspect of its activities.’’ 31 As described of NSCC’s credit exposures to its
securities and funds that are within the above, NSCC proposes to define the members at a confidence level of at least
custody or control of the clearing agency term ‘‘Market Maker Domination 99 percent. The Illiquid Charge is
and to promote the prompt and accurate Charge’’ Procedure XV, Section calculated to address the unique risk
clearance and settlement of securities I(A)(1)(d) of the Rules.32 The characteristics presented by Illiquid
transactions.27 As described above, the Commission believes that this proposed Securities, specifically their lack of
Illiquid Charge could help protect NSCC change could make the Rules more clear marketability and their low and volatile
from potential losses in the event that a and transparent for members that rely share prices, and in consideration of the
member defaults. Specifically, the on them, consistent with Rule 17Ad– credit rating of the member holding the
Illiquid Charge is calculated and 22(e)(1). Illiquid Position. Therefore, the
collected to help mitigate the potential C. Consistency With Rule 17Ad– Commission believes that the proposed
22(e)(4)(i) changes related to the Illiquid Charge
22 For purposes of calculating the MMDC, the
are consistent with Rule 17Ad–
overall unsettled long position is calculated as the Rule 17Ad–22(e)(4)(i) under the Act 22(e)(6)(v) under the Act.36
sum of each member’s net long position. requires a clearing agency to establish,
Application and calculation of the MMDC is
described in Procedure XV of the Rules, Sections implement, maintain and enforce III. Conclusion
I(A)(1)(d) and I(A)(2)(c). Supra note 4. written policies and procedures
23 NSCC defines family-issued securities as reasonably designed to effectively On the basis of the foregoing, the
jstallworth on DSK7TPTVN1PROD with NOTICES
securities that were issued by either that member identify, measure, monitor, and manage Commission finds that the proposal is
or by an affiliate of that member. Procedure XV,
its credit exposures to members and consistent with the requirements of the
Section I(B)(1), supra note 4.
24 Supra note 4.
Act, in particular the requirements of
25 15 U.S.C. 78s(b)(2)(C). 28 Id.
26 15 U.S.C. 78q–1(b)(3)(F); 17 CFR 240.17Ad– 29 Id. 33 17 CFR 240.17Ad–22(e)(4)(i).
30 Id. 34 Id.
22(e)(1); 17 CFR 240.17Ad–22(e)(4)(i); 17 CFR
240.17Ad–22(e)(6). 31 17 CFR 240.17Ad–22(e)(1). 35 17 CFR 240.17Ad–22(e)(6)(v).
27 15 U.S.C. 78q–1(b)(3)(F). 32 Supra note 4. 36 Id.
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![21866 Federal Register / Vol. 82, No. 89 / Wednesday, May 10, 2017 / Notices
Section 17A of the Act 37 and the rules II. Self-Regulatory Organization’s Subject to certain exceptions, CBOE
and regulations thereunder. Statement of the Purpose of, and Clearing Trading Permit Holders
It is therefore ordered, pursuant to Statutory Basis for, the Proposed Rule (‘‘CTPHs’’) 8 are subject to the Net
Section 19(b)(2) of the Act, that Change Capital Rules. However, a subset of
proposed rule change SR–NSCC–2017– In its filing with the Commission, the CTPHs are subsidiaries of U.S. bank
001 be, and hereby is, Approved.38 Exchange included statements holding companies, which, due to their
For the Commission, by the Division of concerning the purpose of and basis for affiliations with their parent U.S. bank
Trading and Markets, pursuant to delegated the proposed rule change and discussed holding companies, must comply with
authority.39 any comments it received on the additional bank regulatory capital
Eduardo A. Aleman, proposed rule change. The text of these requirements pursuant to rulemaking
Assistant Secretary. statements may be examined at the required under the Dodd–Frank Wall
[FR Doc. 2017–09425 Filed 5–9–17; 8:45 am] places specified in Item IV below. The Street Reform and Consumer Protection
BILLING CODE 8011–01–P Exchange has prepared summaries, set Act.9 Pursuant to this mandate, the
forth in sections A, B, and C below, of Board of Governors of the Federal
the most significant aspects of such Reserve System, the Office of the
SECURITIES AND EXCHANGE statements. Comptroller of the Currency, and the
COMMISSION A. Self-Regulatory Organization’s Federal Deposit Insurance Corporation
Statement of the Purpose of, and the have approved a regulatory capital
[Release No. 34–80595; File No. SR–CBOE–
2017–035] Statutory Basis for, the Proposed Rule framework for subsidiaries of U.S. bank
Change holding company clearing firms.10
Self-Regulatory Organizations; Generally, these rules impose higher
1. Purpose
Chicago Board Options Exchange, minimum capital requirements, more
Incorporated; Notice of Filing and The Exchange proposes changes to restrictive capital eligibility standards,
Immediate Effectiveness of a Proposed Rule 6.56 (Compression Forums) to: (1) and higher asset risk weights than were
Rule Change Relating to Compression Make all existing positions in series of previously mandated for CTPHs that are
Forums S&P 500® Index (‘‘SPX’’) options 5 subsidiaries of U.S. bank holding
eligible to be identified as compression- companies under the Net Capital Rules.
May 4, 2017. list positions (and therefore eligible for Furthermore, the new rules do not
Pursuant to Section 19(b)(1) of the a fee rebate if closed in open outcry in
permit deductions for hedged securities
Securities Exchange Act of 1934 (the a compression forum); (2) change the
or offsetting options positions.11 Rather,
‘‘Act’’),1 and Rule 19b–4 thereunder,2 way in which the Exchange will publish
its compression-list positions file; (3) capital charges under these standards
notice is hereby given that on April 21,
amend the rules with respect to are, in large part, based on the aggregate
2017, Chicago Board Options Exchange,
Incorporated (the ‘‘Exchange’’ or requirements for solicited transactions notional value of short positions
‘‘CBOE’’) filed with the Securities and executed through a compression forum; regardless of offsets. As a result, in
Exchange Commission (the and (4) clarify additional portions of the general, CTPHs must hold substantially
‘‘Commission’’) the proposed rule rule text. The Exchange’s proposal is more bank regulatory capital than
change as described in Items I and II intended to make it easier for TPHs to would otherwise be required under the
below, which Items have been prepared efficiently close positions in series of Net Capital Rules. The impact of these
by the Exchange. The Exchange filed the SPX options at the end of each calendar regulatory capital rules are compounded
proposal as a ‘‘non-controversial’’ month in order to mitigate the effects of
proposed rule change pursuant to capital constraints on market position’s gain at any one valuation point is
participants and help ensure continued allowed to offset another position’s loss at the same
Section 19(b)(3)(A)(iii) of the Act 3 and valuation point (e.g. vertical spreads).
Rule 19b–4(f)(6) thereunder.4 The depth of liquidity in the SPX options 8 All CBOE CTPHs must also be clearing members
Commission is publishing this notice to market. of The Options Clearing Corporation (‘‘OCC’’).
solicit comments on the proposed rule Background
9 H.R. 4173 (amending section 3(a) of the
change from interested persons. Securities Exchange Act of 1934 (the ‘‘Act’’) (15
SEC Rule 15c3–1 (Net Capital U.S.C. 78c(a))).
I. Self-Regulatory Organization’s Requirements for Brokers or Dealers) 10 12 CFR 50; 79 FR 61440 (Liquidity Coverage
Statement of the Terms of Substance of (‘‘Net Capital Rules’’) requires registered Ratio: Liquidity Risk Measurement Standards).
11 Many options strategies, including relatively
the Proposed Rule Change broker-dealers, unless otherwise simple strategies often used by retail customers and
The text of the proposed rule change excepted, to maintain certain specified more sophisticated strategies used by market-
is available on the Exchange’s Web site minimum levels of capital.6 The Net makers and institutions, are risk-limited strategies
Capital Rules are designed to protect or options spread strategies that employ offsets or
(http://www.cboe.com/AboutCBOE/ hedges to achieve certain investment outcomes.
CBOELegalRegulatoryHome.aspx), at securities customers, counterparties,
Such strategies typically involve the purchase and
the Exchange’s Office of the Secretary, and creditors by requiring that broker- sale of multiple options (and may be coupled with
and at the Commission’s Public dealers have sufficient liquid resources purchases or sales of the underlying securities),
Reference Room. on hand, at all times, to meet their executed simultaneously as part of the same
financial obligations. Notably, hedged strategy. In many cases, the potential market
exposure of these strategies is limited and defined.
37 15
positions, including offsetting futures Whereas regulatory capital requirements have
U.S.C. 78q–1.
and options contract positions, result in historically reflected the risk-limited nature of
jstallworth on DSK7TPTVN1PROD with NOTICES
38 In approving the proposed rule change, the
Commission considered the proposals’ impact on certain net capital requirement carrying offsetting positions, these positions may
efficiency, competition, and capital formation. 15 reductions under the Net Capital Rules.7 now be subject to higher regulatory capital
U.S.C. 78c(f). requirements. Various factors, including
39 17 CFR 200.30–3(a)(12). administration costs; transaction fees; and limited
5 Including groups of series with both ticker
1 15 U.S.C. 78s(b)(1).
market demand or counterparty interest, however,
symbols SPX and SPXW. may discourage market participants from closing
2 17 CFR 240.19b–4. 6 17 CFR 240.15c3–1.
these positions even though many market
3 15 U.S.C. 78s(b)(3)(A)(iii). 7 In addition, the Net Capital Rules permit various participants likely would prefer to close the
4 17 CFR 240.19b–4(f)(6). offsets under which a percentage of an option positions rather than carry them to expiration.
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Document Created: 2017-05-10 00:01:01
Document Modified: 2017-05-10 00:01:01
| 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 | 82 FR 21863 |
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