82_FR_31512 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

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)

Page Range31384-31386
FR Document2017-14141

Federal Register, Volume 82 Issue 128 (Thursday, 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\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(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



                                                31384                           Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices

                                                that could be cleared and settled at                        For the Commission, by the Division of               II. Clearing Agency’s Statement of the
                                                MBSD, and it would remove the size                       Trading and Markets, pursuant to delegated              Purpose of, and Statutory Basis for, the
                                                restrictions with respect to SBO-                        authority.73                                            Proposed Rule Change
                                                Destined Trades.                                         Jill M. Peterson,                                          In its filing with the Commission, the
                                                   With these changes, which were                        Assistant Secretary.                                    clearing agency included statements
                                                developed in consideration of the                        [FR Doc. 2017–14142 Filed 7–5–17; 8:45 am]              concerning the purpose of and basis for
                                                feedback received from MBSD Clearing                     BILLING CODE 8011–01–P                                  the proposed rule change and discussed
                                                Members,69 FICC could provide a more                                                                             any comments it received on the
                                                efficient and effective operational                                                                              proposed rule change. The text of these
                                                processes in connection with the                         SECURITIES AND EXCHANGE                                 statements may be examined at the
                                                                                                         COMMISSION                                              places specified in Item IV below. The
                                                clearance and settlement of MBS trades,
                                                                                                                                                                 clearing agency has prepared
                                                expand the scope of products cleared
                                                                                                         [Release No. 34–81044; File No. SR–NSCC–                summaries, set forth in sections A, B,
                                                and settled by MBSD, and enable                                                                                  and C below, of the most significant
                                                Clearing Members to submit such trades                   2017–009]
                                                                                                                                                                 aspects of such statements.
                                                in any size. Therefore, the Commission
                                                                                                         Self-Regulatory Organizations;                          (A) Clearing Agency’s Statement of the
                                                believes that the Proposed Rule Change
                                                                                                         National Securities Clearing                            Purpose of, and Statutory Basis for, the
                                                is designed to help FICC be more
                                                                                                         Corporation; Notice of Filing and                       Proposed Rule Change
                                                efficient and effective in meeting the
                                                                                                         Immediate Effectiveness of a Proposed
                                                requirements of its participants and the                 Rule Change To Further Describe and                     1. Purpose
                                                markets it serves, and in providing                      Codify Existing Practices Relating to                   Proposal Overview
                                                clearing and settlement arrangements,                    the Bond Haircut
                                                operating structure, and scope of                                                                                  The proposed rule change would
                                                products cleared or settled, which is                    June 29, 2017.                                          provide additional transparency in the
                                                consistent with Rule 17Ad–22(e)(21).                                                                             Rules with respect to the calculation
                                                                                                            Pursuant toSection 19(b)(1) of the                   and the application of the Bond Haircut.
                                                V. Conclusion                                            Securities Exchange Act of 1934                         NSCC currently excludes Net Unsettled
                                                                                                         (‘‘Act’’) 1 and Rule 19b–4 thereunder,2                 Positions in corporate and municipal
                                                  On the basis of the foregoing, the                     notice is hereby given that on June 23,                 bonds from its parametric VaR
                                                Commission finds that the Proposed                       2017, National Securities Clearing                      calculation and instead charges a Bond
                                                Rule Change is consistent with the                       Corporation (‘‘NSCC’’) filed with the                   Haircut, which is calculated by
                                                requirements of the Act and in                           Securities and Exchange Commission                      multiplying the absolute value of the
                                                particular with the requirements of                      (‘‘Commission’’) the proposed rule                      Net Unsettled Positions in each security
                                                Section 17A of the Act 70 and the rules                  change as described in Items I, II and III              by a percentage that is no less than two
                                                and regulations promulgated                              below, which Items have been prepared                   percent.
                                                thereunder.                                              by the clearing agency. The Commission                    NSCC is proposing to enhance the
                                                                                                         is publishing this notice to solicit                    description of the Bond Haircut in
                                                  It is therefore ordered, pursuant to                   comments on the proposed rule change                    Procedure XV to provide more detail
                                                Section 19(b)(2) of the Act 71 that                      from interested persons.                                regarding the determination of the
                                                proposed rule change SR–FICC–2017–                                                                               applied percentage, and to codify
                                                012 be, and hereby is, approved.72                       I. Clearing Agency’s Statement of the
                                                                                                                                                                 NSCC’s existing practice of applying the
                                                                                                         Terms of Substance of the Proposed
                                                                                                                                                                 Bond Haircut to all corporate and
                                                                                                         Rule Change
                                                                                                                                                                 municipal bonds without discretion.
                                                   69 FICC describes in Item 7 of its Form 19b–4

                                                responses the extent to which the proposed changes          The proposed rule change consists of                 The Required Deposit and the Bond
                                                were informed by feedback from its Clearing              amendments to NSCC’s Rules &                            Haircut
                                                Members and various working groups over                  Procedures (‘‘Rules’’) 3 in order to (1)
                                                                                                                                                                    A primary objective of NSCC’s
                                                numerous years. Available at http://www.dtcc.com/        provide additional transparency in the
                                                legal/sec-rule-filings. Specifically, FICC states that                                                           Clearing Fund is to have on deposit
                                                                                                         Rules with respect to the existing
                                                in 2015, 92 Clearing Member representatives                                                                      from each applicable Member assets
                                                                                                         methodology for calculating margin on
                                                participated in forums held in June, and 157                                                                     sufficient to satisfy losses that may
                                                                                                         Members’ Net Unsettled Positions and
                                                representatives participated in forums in September                                                              otherwise be incurred by NSCC as the
                                                                                                         Net Balance Order Unsettled Positions
                                                and October. Id. FICC states that in 2016, 139                                                                   result of the default of the Member and
                                                representatives participated in forums held in           (for purposes of this filing, referred to
                                                                                                                                                                 the resultant close out of that Member’s
                                                March, 241 representatives participated in forums        collectively herein as ‘‘Net Unsettled
                                                                                                                                                                 unsettled positions under NSCC’s trade
                                                held in August, and 121 participated in forums held      Positions’’) in corporate and municipal
                                                                                                                                                                 guaranty. Each Member’s Clearing Fund
                                                in December. Id. Additionally, FICC states that it       bonds (‘‘Bond Haircut’’), which are
                                                held a number of conference calls with individual                                                                required deposit is calculated daily
                                                                                                         excluded from the parametric volatility
                                                Clearing Members to address questions and                                                                        pursuant to a formula set forth in
                                                                                                         component of the margin calculation
                                                concerns on the subject. Id. Moreover, FICC                                                                      Procedure XV of the Rules designed to
                                                                                                         (‘‘VaR Charge’’); and (2) codify NSCC’s
                                                explains that the Proposed Rule Change was even                                                                  provide sufficient funds to cover this
                                                the subject of a prior rule filing with the              existing practice of applying the Bond
                                                                                                                                                                 risk of loss. The Clearing Fund formula
                                                Commission to fund the proposed changes. Id. See         Haircut to all corporate and municipal
                                                                                                                                                                 accounts for a variety of risk factors
                                                also Exchange Act Release No. 74033 (January 12,         bonds without discretion, as described
sradovich on DSK3GMQ082PROD with NOTICES




                                                                                                                                                                 through the application of a number of
                                                2015), 80 FR 2452 (January 16, 2015) (SR–FICC–           below.
                                                2014–12).                                                                                                        charges, each described in Procedure
                                                   70 15 U.S.C. 78q–1.
                                                                                                              73 17
                                                                                                                                                                 XV.
                                                                                                                 CFR 200.30–3(a)(12).                               The VaR Charge is a core component
                                                   71 15 U.S.C. 78s(b)(2).                                    1 15
                                                                                                                U.S.C. 78s(b)(1).
                                                   72 In approving the proposed rule change, the           2 17 CFR 240.19b–4.
                                                                                                                                                                 of this formula and is designed to
                                                Commission considered the proposals’ impact on             3 Terms not defined herein are defined in the         calculate the amount of money that may
                                                efficiency, competition, and capital formation. 15       Rules, available at www.dtcc.com/∼/media/Files/         be lost on a portfolio over a given period
                                                U.S.C. 78c(f).                                           Downloads/legal/rules/nscc_rules.pdf.                   of time assumed necessary to liquidate


                                           VerDate Sep<11>2014   18:13 Jul 05, 2017   Jkt 241001   PO 00000     Frm 00102   Fmt 4703   Sfmt 4703   E:\FR\FM\06JYN1.SGM   06JYN1


                                                                                 Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices                                                  31385

                                                the portfolio, within a given level of                    for each security group is recalculated               discretion to exclude certain securities,
                                                confidence. Pursuant to Procedure XV,                     periodically, based on a predetermined                as described therein and other than
                                                NSCC may currently exclude from this                      frequency. While NSCC is proposing to                 corporate and municipal bonds, from its
                                                calculation Net Unsettled Positions in                    clarify in Procedure XV that such                     VaR margin calculation and instead
                                                classes of securities whose volatility is                 recalculation shall occur at least                    apply a haircut-based margin charge.
                                                amenable to generally accepted                            annually, currently the recalculation is              NSCC would add new Sections
                                                statistical analysis only in a complex                    performed on a daily basis.6                          I.(A)(1)(a)(iii) and (2)(a)(iii) to Procedure
                                                manner, including corporate and                              Further, NSCC determines the                       XV to include more transparency
                                                municipal bonds.                                          appropriate specified look-back period                around the determination of the Bond
                                                   NSCC believes the Bond Haircut is a                    and predetermined calibration                         Haircut and to make clear that the Bond
                                                more appropriate measure of the risk                      percentile, which shall not be less than              Haircut shall apply to all Net Unsettled
                                                presented to NSCC by its Members’                         99 percent, in order to account for the               Positions in corporate and municipal
                                                positions in corporate and municipal                      particularized risk characteristics of                bonds, in lieu of a VaR Charge, and
                                                bonds than the VaR Charge because the                     corporate bonds, including market,                    would not be subject to NSCC’s
                                                volatility of these securities is generally               liquidity and idiosyncratic risk (i.e., the           discretion.
                                                amenable to statistical analysis only in                  volatility of a particular issue compared
                                                a complex manner. Because NSCC                            to the volatility of the index).                      2. Statutory Basis
                                                believes the Bond Haircut is more                                                                                  Section 17A(b)(3)(F) of the Act,
                                                                                                          b. Municipal Bonds                                    requires, in part, that the Rules promote
                                                effective in capturing the risks
                                                presented by corporate and municipal                         The Bond Haircut for positions in                  the prompt and accurate clearance and
                                                bonds, in addition to adding more detail                  municipal bonds is calculated at the                  settlement of securities transactions.7
                                                to Procedure XV regarding the                             CUSIP level. In order to account for                  The proposed rule change with respect
                                                calculation of the Bond Haircut, NSCC                     price and valuation volatility, NSCC has              to the Bond Haircut would provide
                                                is also proposing to codify its existing                  set a tenor-based haircut schedule that               additional transparency in the Rules
                                                practice by removing reference to                         applies according to the remaining time               regarding the calculation and
                                                discretion in application of the Bond                     to maturity for separate categories of                application of the Bond Haircut, and
                                                Haircut to these securities.                              municipal bonds. Currently, NSCC                      would codify NSCC’s practice to apply
                                                                                                          applies this schedule to six separate                 the Bond Haircut to all positions in
                                                a. Corporate Bonds                                        categories of municipal bonds. For                    corporate and municipal bonds without
                                                   In order to calculate the Bond Haircut                 municipal bonds rated BBB+ or lower                   discretion. The proposed changes would
                                                for positions in corporate bonds, NSCC                    and for non-rated bonds, an additional                ensure that the Rules remain
                                                first categorizes corporate bonds into                    factor is applied based on the applicable             transparent, accurate and clear, which
                                                security groups according to the bonds’                   municipal sector. If a municipal bond is              would enable all stakeholders to readily
                                                remaining time to maturity and credit                     not mapped to any particular sector, the              understand their rights and obligations
                                                rating. NSCC then aligns each security                    highest numerical municipal factor is                 in connection with NSCC’s clearance
                                                group against a Merrill Lynch bond                        applied to positions in that bond. NSCC               and settlement of securities
                                                index.4 Each bond index is chosen to                      reviews and re-assigns, as necessary, the             transactions. Therefore, NSCC believes
                                                provide a valuation proxy for computing                   risk factors assigned to each municipal               that the proposed rule changes would
                                                the appropriate margin for securities                     sector no less frequently than annually.              promote the prompt and accurate
                                                categorized into that group. NSCC                            This additional factor is added to                 clearance and settlement of securities
                                                calculates a haircut rate applicable to                   lower rated municipal bonds because                   transactions, consistent with Section
                                                each security group based on historical                   variable risk factors exist between                   17A(b)(3)(F) of the Act.8
                                                returns of the aligned Merrill Lynch                      municipal sectors. In addition to the                    Rule 17Ad–22(e)(23)(i) under the Act
                                                bond index in the specified look-back                     risk associated with time-to-maturity,                requires, in part, that NSCC establish,
                                                period and a predetermined calibration                    municipal bonds may also pose credit                  implement, maintain and enforce
                                                percentile. NSCC is proposing to clarify                  risk depending upon the bonds’                        written policies and procedures
                                                in Procedure XV that the look-back                        assigned credit rating. The added sector-             reasonably designed to provide for
                                                period shall be no shorter than 10 years.                 based factor, applicable to lower-rated               publicly disclosing all relevant rules
                                                Currently, the look-back period is from                   municipal bonds, is designed to                       and material procedures.9 Rule 17Ad–
                                                1995 to present day.5 The haircut rate                    compensate for this additional credit                 22(e)(23)(ii) under the Act requires, in
                                                                                                          risk. Therefore, NSCC believes the Bond               part, that NSCC establish, implement,
                                                   4 Bond indices are widely used to measure the
                                                                                                          Haircut as applied to municipal bonds                 maintain and enforce written policies
                                                risk of particular classes of corporate bonds. By         is also an appropriate measure for the
                                                aligning each security group to a Merrill Lynch                                                                 and procedures reasonably designed to
                                                bond index, NSCC is able to use widely accepted           risk presented by these positions.                    provide sufficient information to enable
                                                historical pricing information as a valuation proxy       Proposed Changes to Procedure XV                      participants to identify and evaluate the
                                                for each security group to correlate with the actual                                                            risks, fees, and other material costs they
                                                risk coverage for the particular attributes of the          In order to make the proposed                       incur by participating in NSCC.10 The
                                                bonds. Using these reliable pricing proxies permits       changes, NSCC would exclude Net
                                                NSCC to conduct loss estimation associated with                                                                 proposed rule change enhances the
                                                clearing these securities in a less complex statistical   Unsettled Positions in corporate and                  transparency in the Rules regarding the
                                                manner, while achieving the desired coverage              municipal bonds from Procedure XV,                    calculation and application of the Bond
                                                target.                                                   Sections I.(A)(1)(a)(ii) and (2)(a)(ii).              Haircut and codifies NSCC’s practice to
                                                   5 NSCC regularly reviews whether its margining
                                                                                                          These Sections of Procedure XV would
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                                                methodology is achieving the desired risk                                                                       apply the Bond Haircut to all positions
                                                mitigation objectives. In connection with such
                                                                                                          continue to provide NSCC with                         in corporate and municipal bonds
                                                review, NSCC has determined to make technical                                                                   without discretion. In this way, the
                                                enhancements to the calculation of the Bond               Settlement Supervision Act of 2010. 12 U.S.C.
                                                Haircut as applied to positions in corporate bonds,       5465(e)(1).
                                                                                                                                                                  7 15    U.S.C. 78q–1(b)(3)(F).
                                                including an adjustment to this look-back period.           6 NSCC has also determined that the frequency of
                                                                                                                                                                  8 Id.
                                                Such enhancements shall be proposed pursuant to           re-calibration of the haircut rates should be
                                                                                                                                                                  9 17    CFR 240.17Ad–22(e)(23)(i).
                                                a separate advance notice filing, to be filed pursuant    adjusted, and will propose to change this frequency
                                                to Section 806(e)(1) of the Payment, Clearing, and        pursuant to an advance notice filing. Id.               10 17    CFR 240.17Ad–22(e)(23)(ii).



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                                                31386                             Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices

                                                proposed rule change provides for the                      Electronic Comments                                       DEPARTMENT OF STATE
                                                public disclosure, through the new
                                                Procedure XV, Sections I.(A)(1)(a)(iii)                      • Use the Commission’s Internet                         [Public Notice 10050]
                                                and (2)(a)(iii) of the Rules, of the rules                 comment form (http://www.sec.gov/
                                                                                                                                                                     60-Day Notice of Proposed Information
                                                and procedures through which NSCC                          rules/sro.shtml); or
                                                                                                                                                                     Collection: Individual, Corporate or
                                                calculates and applies the Bond Haircut.                     • Send an email to rule-comments@                       Foundation, and Government Donor
                                                The proposed rule change would allow                       sec.gov. Please include File Number SR–                   Letter Applications
                                                NSCC to further provide its participants                   NSCC–2017–009 on the subject line.
                                                with sufficient information regarding                                                                                      Notice of request for public
                                                                                                                                                                     ACTION:
                                                the Bond Haircut to enable those                           Paper Comments                                            comment.
                                                participants to identify and evaluate the
                                                                                                             • Send paper comments in triplicate                     SUMMARY:    The Department of State is
                                                risks and material costs associated with
                                                                                                           to Secretary, Securities and Exchange                     seeking Office of Management and
                                                the calculation and application of the
                                                Bond Haircut, which are incurred                           Commission, 100 F Street NE.,                             Budget (OMB) approval for the
                                                through their participation in NSCC. As                    Washington, DC 20549.                                     information collection described below.
                                                such, NSCC believes the proposed rule                                                                                In accordance with the Paperwork
                                                                                                           All submissions should refer to File                      Reduction Act of 1995, we are
                                                change is consistent with Rule 17Ad–                       Number SR–NSCC–2017–009. This file
                                                22(e)(23)(i) and (ii) under the Act.11                                                                               requesting comments on this collection
                                                                                                           number should be included on the                          from all interested individuals and
                                                (B) Clearing Agency’s Statement on                         subject line if email is used. To help the                organizations. The purpose of this
                                                Burden on Competition                                      Commission process and review your                        notice is to allow 60 days for public
                                                                                                           comments more efficiently, please use                     comment preceding submission of the
                                                  NSCC does not believe that the                           only one method. The Commission will                      collection to OMB.
                                                proposed rule change would impact                          post all comments on the Commission’s                     DATES: The Department will accept
                                                competition.12 The proposed rule                           Internet Web site (http://www.sec.gov/
                                                change would increase transparency of                                                                                comments from the public up to
                                                                                                           rules/sro.shtml). Copies of the                           September 5, 2017.
                                                the Rules by codifying NSCC’s current
                                                                                                           submission, all subsequent                                ADDRESSES: You may submit comments
                                                practice with respect to the assessment
                                                                                                           amendments, all written statements                        by any of the following methods:
                                                and imposition of the Bond Haircut. As
                                                such, NSCC believes that the proposed                      with respect to the proposed rule                            • Web: Persons with access to the
                                                rule change would not impact Members                       change that are filed with the                            Internet may comment on this notice by
                                                or have any impact on competition.                         Commission, and all written                               going to www.Regulations.gov. You can
                                                                                                           communications relating to the                            search for the document by entering
                                                (C) Clearing Agency’s Statement on                         proposed rule change between the                          ‘‘Docket Number: DOS–2017–0027’’ in
                                                Comments on the Proposed Rule                              Commission and any person, other than                     the Search field. Then click the
                                                Change Received From Members,                              those that may be withheld from the                       ‘‘Comment Now’’ button and complete
                                                Participants, or Others                                    public in accordance with the                             the comment form.
                                                                                                           provisions of 5 U.S.C. 552, will be                          • Email: MEDCS@state.gov.
                                                  NSCC has not received any written                                                                                     • Regular Mail: Send written
                                                comments relating to this proposal.                        available for Web site viewing and                        comments to: M/EDCS Room 7427B,
                                                NSCC will notify the Commission of any                     printing in the Commission’s Public                       2201 C Street, Washington, DC 20520.
                                                written comments it receives.                              Reference Room, 100 F Street NE.,                            You must include the DS form
                                                                                                           Washington, DC 20549 on official                          number (if applicable), information
                                                III. Date of Effectiveness of the
                                                                                                           business days between the hours of                        collection title, and the OMB control
                                                Proposed Rule Change, and Timing for
                                                Commission Action                                          10:00 a.m. and 3:00 p.m. Copies of the                    number in any correspondence.
                                                                                                           filing also will be available for                         FOR FURTHER INFORMATION CONTACT:
                                                   The foregoing rule change has become                    inspection and copying at the principal                   Direct requests for additional
                                                effective pursuant to Section 19(b)(3)(A)                  office of NSCC and on DTCC’s Web site                     information regarding the collection
                                                of the Act and paragraph (f) of Rule                       (http://dtcc.com/legal/sec-rule-                          listed in this notice, including requests
                                                19b–4 thereunder. At any time within                       filings.aspx). All comments received                      for copies of the proposed collection
                                                60 days of the filing of the proposed rule                 will be posted without change; the                        instrument and supporting documents,
                                                change, the Commission summarily may                       Commission does not edit personal                         to Chanel Wallace, who may be reached
                                                temporarily suspend such rule change if                    identifying information from                              on (202) 647–7730 or at WallaceCR2@
                                                it appears to the Commission that such                     submissions. You should submit only                       stat.gov.
                                                action is necessary or appropriate in the                  information that you wish to make                         SUPPLEMENTARY INFORMATION:
                                                public interest, for the protection of
                                                                                                           available publicly. All submissions                          • Title of Information Collection:
                                                investors, or otherwise in furtherance of
                                                                                                           should refer to File Number SR–NSCC–                      Individual, Corporate or Foundation
                                                the purposes of the Act.
                                                                                                           2017–009 and should be submitted on                       and Government Donor Letter
                                                IV. Solicitation of Comments                               or before July 27, 2017.                                  Application.
                                                                                                                                                                        • OMB Control Number: 1405–0218.
                                                  Interested persons are invited to                           For the Commission, by the Division of                    • Type of Request: Extension of a
                                                submit written data, views and                             Trading and Markets, pursuant to delegated                Currently Approved Collection.
                                                arguments concerning the foregoing,                        authority.13                                                 • Originating Office: Office of
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                                                including whether the proposed rule                        Jill M. Peterson,                                         Emergencies in the Diplomatic and
                                                change is consistent with the Act.                         Assistant Secretary.                                      Consular Service (M/EDCS).
                                                Comments may be submitted by any of                        [FR Doc. 2017–14141 Filed 7–5–17; 8:45 am]                   • Form Number: DS–4273, DS–4272
                                                the following methods:                                                                                               and DS–4271.
                                                                                                           BILLING CODE 8011–01–P
                                                                                                                                                                        • Respondents: Individuals,
                                                  11 17   CFR 240.17Ad–22(e)(23)(i), (ii).                                                                           Corporations, or Foundations that make
                                                  12 15   U.S.C. 78q–1(b)(3)(I).                                13 17   CFR 200.30–3(a)(12).                         donations to the Department.


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Document Created: 2017-07-06 01:04:55
Document Modified: 2017-07-06 01:04:55
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation82 FR 31384 

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