82 FR 31384 - Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Further Describe and Codify Existing Practices Relating to the Bond Haircut

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 128 (July 6, 2017)

[Federal Register Volume 82, Number 128 (Thursday, July 6, 2017)]
[Notices]
[Pages 31384-31386]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-14141]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81044; File No. SR-NSCC-2017-009]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed 
Rule Change To Further Describe and Codify Existing Practices Relating 
to the Bond Haircut

June 29, 2017.
    Pursuant toSection 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 23, 2017, 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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    \73\ 17 CFR 200.30-3(a)(12).
    \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 NSCC's Rules & 
Procedures (``Rules'') \3\ in order to (1) provide additional 
transparency in the Rules with respect to the existing methodology for 
calculating margin on Members' Net Unsettled Positions and Net Balance 
Order Unsettled Positions (for purposes of this filing, referred to 
collectively herein as ``Net Unsettled Positions'') in corporate and 
municipal bonds (``Bond Haircut''), which are excluded from the 
parametric volatility component of the margin calculation (``VaR 
Charge''); and (2) codify NSCC's existing practice of applying the Bond 
Haircut to all corporate and municipal bonds without discretion, as 
described below.
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    \3\ Terms not defined herein are defined in the Rules, available 
at www.dtcc.com/~/media/Files/Downloads/legal/rules/nscc_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

1. Purpose
Proposal Overview
    The proposed rule change would provide additional transparency in 
the Rules with respect to the calculation and the application of the 
Bond Haircut. NSCC currently excludes Net Unsettled Positions in 
corporate and municipal bonds from its parametric VaR calculation and 
instead charges a Bond Haircut, which is calculated by multiplying the 
absolute value of the Net Unsettled Positions in each security by a 
percentage that is no less than two percent.
    NSCC is proposing to enhance the description of the Bond Haircut in 
Procedure XV to provide more detail regarding the determination of the 
applied percentage, and to codify NSCC's existing practice of applying 
the Bond Haircut to all corporate and municipal bonds without 
discretion.
The Required Deposit and the Bond Haircut
    A primary objective of NSCC's Clearing Fund is to have on deposit 
from each applicable Member assets sufficient to satisfy losses that 
may otherwise be incurred by NSCC as the result of the default of the 
Member and the resultant close out of that Member's unsettled positions 
under NSCC's trade guaranty. Each Member's Clearing Fund required 
deposit is calculated daily pursuant to a formula set forth in 
Procedure XV of the Rules designed to provide sufficient funds to cover 
this risk of loss. The Clearing Fund formula accounts for a variety of 
risk factors through the application of a number of charges, each 
described in Procedure XV.
    The VaR Charge is a core component of this formula and is designed 
to calculate the amount of money that may be lost on a portfolio over a 
given period of time assumed necessary to liquidate

[[Page 31385]]

the portfolio, within a given level of confidence. Pursuant to 
Procedure XV, NSCC may currently exclude from this calculation Net 
Unsettled Positions in classes of securities whose volatility is 
amenable to generally accepted statistical analysis only in a complex 
manner, including corporate and municipal bonds.
    NSCC believes the Bond Haircut is a more appropriate measure of the 
risk presented to NSCC by its Members' positions in corporate and 
municipal bonds than the VaR Charge because the volatility of these 
securities is generally amenable to statistical analysis only in a 
complex manner. Because NSCC believes the Bond Haircut is more 
effective in capturing the risks presented by corporate and municipal 
bonds, in addition to adding more detail to Procedure XV regarding the 
calculation of the Bond Haircut, NSCC is also proposing to codify its 
existing practice by removing reference to discretion in application of 
the Bond Haircut to these securities.
a. Corporate Bonds
    In order to calculate the Bond Haircut for positions in corporate 
bonds, NSCC first categorizes corporate bonds into security groups 
according to the bonds' remaining time to maturity and credit rating. 
NSCC then aligns each security group against a Merrill Lynch bond 
index.\4\ Each bond index is chosen to provide a valuation proxy for 
computing the appropriate margin for securities categorized into that 
group. NSCC calculates a haircut rate applicable to each security group 
based on historical returns of the aligned Merrill Lynch bond index in 
the specified look-back period and a predetermined calibration 
percentile. NSCC is proposing to clarify in Procedure XV that the look-
back period shall be no shorter than 10 years. Currently, the look-back 
period is from 1995 to present day.\5\ The haircut rate for each 
security group is recalculated periodically, based on a predetermined 
frequency. While NSCC is proposing to clarify in Procedure XV that such 
recalculation shall occur at least annually, currently the 
recalculation is performed on a daily basis.\6\
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    \4\ Bond indices are widely used to measure the risk of 
particular classes of corporate bonds. By aligning each security 
group to a Merrill Lynch bond index, NSCC is able to use widely 
accepted historical pricing information as a valuation proxy for 
each security group to correlate with the actual risk coverage for 
the particular attributes of the bonds. Using these reliable pricing 
proxies permits NSCC to conduct loss estimation associated with 
clearing these securities in a less complex statistical manner, 
while achieving the desired coverage target.
    \5\ NSCC regularly reviews whether its margining methodology is 
achieving the desired risk mitigation objectives. In connection with 
such review, NSCC has determined to make technical enhancements to 
the calculation of the Bond Haircut as applied to positions in 
corporate bonds, including an adjustment to this look-back period. 
Such enhancements shall be proposed pursuant to a separate advance 
notice filing, to be filed pursuant to Section 806(e)(1) of the 
Payment, Clearing, and Settlement Supervision Act of 2010. 12 U.S.C. 
5465(e)(1).
    \6\ NSCC has also determined that the frequency of re-
calibration of the haircut rates should be adjusted, and will 
propose to change this frequency pursuant to an advance notice 
filing. Id.
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    Further, NSCC determines the appropriate specified look-back period 
and predetermined calibration percentile, which shall not be less than 
99 percent, in order to account for the particularized risk 
characteristics of corporate bonds, including market, liquidity and 
idiosyncratic risk (i.e., the volatility of a particular issue compared 
to the volatility of the index).
b. Municipal Bonds
    The Bond Haircut for positions in municipal bonds is calculated at 
the CUSIP level. In order to account for price and valuation 
volatility, NSCC has set a tenor-based haircut schedule that applies 
according to the remaining time to maturity for separate categories of 
municipal bonds. Currently, NSCC applies this schedule to six separate 
categories of municipal bonds. For municipal bonds rated BBB+ or lower 
and for non-rated bonds, an additional factor is applied based on the 
applicable municipal sector. If a municipal bond is not mapped to any 
particular sector, the highest numerical municipal factor is applied to 
positions in that bond. NSCC reviews and re-assigns, as necessary, the 
risk factors assigned to each municipal sector no less frequently than 
annually.
    This additional factor is added to lower rated municipal bonds 
because variable risk factors exist between municipal sectors. In 
addition to the risk associated with time-to-maturity, municipal bonds 
may also pose credit risk depending upon the bonds' assigned credit 
rating. The added sector-based factor, applicable to lower-rated 
municipal bonds, is designed to compensate for this additional credit 
risk. Therefore, NSCC believes the Bond Haircut as applied to municipal 
bonds is also an appropriate measure for the risk presented by these 
positions.
Proposed Changes to Procedure XV
    In order to make the proposed changes, NSCC would exclude Net 
Unsettled Positions in corporate and municipal bonds from Procedure XV, 
Sections I.(A)(1)(a)(ii) and (2)(a)(ii). These Sections of Procedure XV 
would continue to provide NSCC with discretion to exclude certain 
securities, as described therein and other than corporate and municipal 
bonds, from its VaR margin calculation and instead apply a haircut-
based margin charge. NSCC would add new Sections I.(A)(1)(a)(iii) and 
(2)(a)(iii) to Procedure XV to include more transparency around the 
determination of the Bond Haircut and to make clear that the Bond 
Haircut shall apply to all Net Unsettled Positions in corporate and 
municipal bonds, in lieu of a VaR Charge, and would not be subject to 
NSCC's discretion.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act, requires, in part, that the Rules 
promote the prompt and accurate clearance and settlement of securities 
transactions.\7\ The proposed rule change with respect to the Bond 
Haircut would provide additional transparency in the Rules regarding 
the calculation and application of the Bond Haircut, and would codify 
NSCC's practice to apply the Bond Haircut to all positions in corporate 
and municipal bonds without discretion. The proposed changes would 
ensure that the Rules remain transparent, accurate and clear, which 
would enable all stakeholders to readily understand their rights and 
obligations in connection with NSCC's clearance and settlement of 
securities transactions. Therefore, NSCC believes that the proposed 
rule changes would promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\8\
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ Id.
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    Rule 17Ad-22(e)(23)(i) under the Act requires, in part, that NSCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for publicly disclosing all 
relevant rules and material procedures.\9\ Rule 17Ad-22(e)(23)(ii) 
under the Act requires, in part, that NSCC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide sufficient information to enable participants to 
identify and evaluate the risks, fees, and other material costs they 
incur by participating in NSCC.\10\ The proposed rule change enhances 
the transparency in the Rules regarding the calculation and application 
of the Bond Haircut and codifies NSCC's practice to apply the Bond 
Haircut to all positions in corporate and municipal bonds without 
discretion. In this way, the

[[Page 31386]]

proposed rule change provides for the public disclosure, through the 
new Procedure XV, Sections I.(A)(1)(a)(iii) and (2)(a)(iii) of the 
Rules, of the rules and procedures through which NSCC calculates and 
applies the Bond Haircut. The proposed rule change would allow NSCC to 
further provide its participants with sufficient information regarding 
the Bond Haircut to enable those participants to identify and evaluate 
the risks and material costs associated with the calculation and 
application of the Bond Haircut, which are incurred through their 
participation in NSCC. As such, NSCC believes the proposed rule change 
is consistent with Rule 17Ad-22(e)(23)(i) and (ii) under the Act.\11\
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    \9\ 17 CFR 240.17Ad-22(e)(23)(i).
    \10\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \11\ 17 CFR 240.17Ad-22(e)(23)(i), (ii).
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change would impact 
competition.\12\ The proposed rule change would increase transparency 
of the Rules by codifying NSCC's current practice with respect to the 
assessment and imposition of the Bond Haircut. As such, NSCC believes 
that the proposed rule change would not impact Members or have any 
impact on competition.
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    \12\ 15 U.S.C. 78q-1(b)(3)(I).
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(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 it 
receives.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act and paragraph (f) of Rule 19b-4 thereunder. At 
any time within 60 days of the filing of the proposed rule change, the 
Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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-2017-009 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-2017-009. 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-2017-009 and should be 
submitted on or before July 27, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Jill M. Peterson,
Assistant Secretary.
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    \13\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2017-14141 Filed 7-5-17; 8:45 am]
 BILLING CODE 8011-01-P