82 FR 43054 - Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection to an Advance Notice To Expand the Application of the Family-Issued Securities Charge
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 176 (September 13, 2017)
Federal Register Volume 82, Issue 176 (September 13, 2017)
| Page Range | 43054-43056 | |
| FR Document | 2017-19375 |
[Federal Register Volume 82, Number 176 (Wednesday, September 13, 2017)] [Notices] [Pages 43054-43056] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-19375] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-81545; File No. SR-NSCC-2017-804] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection to an Advance Notice To Expand the Application of the Family-Issued Securities Charge September 7, 2017. On July 10, 2017, National Securities Clearing Corporation (``NSCC'') filed with the Securities and Exchange Commission (``Commission'') advance notice SR-NSCC-2017-804 (``Advance Notice'') pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 (``Exchange Act'').\3\ The Advance Notice was published for comment in the Federal Register on August 8, 2017.\4\ The Commission did not receive any comments on the Advance Notice. This publication serves as notice that the Commission does not object to the changes set forth in the Advance Notice. --------------------------------------------------------------------------- \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight Council designated NSCC a systemically important financial market utility on July 18, 2012. See Financial Stability Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, NSCC is required to comply with the Clearing Supervision Act and file advance notices with the Commission. See 12 U.S.C. 5465(e). \2\ 17 CFR 240.19b-4(n)(1)(i). \3\ 15 U.S.C. 78s(b)(1). \4\ Securities Exchange Act Release No. 81286 (August 2, 2017), 82 FR 37141 (August 8, 2017) (SR-NSCC-2017-804) (``Notice''). NSCC also filed a related proposed rule change with the Commission pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, seeking approval of changes to its rules necessary to implement the Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. The proposed rule change was published in the Federal Register on July 31, 2017. Securities Exchange Act Release No. 81203 (July 25, 2017), 82 FR 35563 (July 31, 2017) (SR- NSCC-2017-010). The Commission did not receive any comments on that proposal. --------------------------------------------------------------------------- I. Description of the Advance Notice The Advance Notice is a proposal by NSCC to further address specific wrong-way risk \5\ that is present when NSCC acts as central counterparty to a transaction with an NSCC member (``Member'') where the underlying securities are securities issued by such Member or an affiliate of such Member (``family-issued securities'').\6\ Currently, NSCC applies a targeted margin charge to address the specific wrong-way risk of family-issued securities transactions (``FIS Charge'') where the Member is on NSCC's Watch List.\7\ NSCC believes that Members on the Watch List present a higher credit risk (i.e., a greater risk of defaulting on their settlement obligations), compared to Members not on the Watch List. As such, the family-issued securities of Members on the Watch List currently receive a FIS Charge because of the increased credit risk presented by such Members. As described in detail below, NSCC proposes in the Advance Notice to expand the application of the FIS Charge to all Members, regardless of a Member's Watch List status, but still maintain a higher FIS Charge for Members that present a greater credit risk to NSCC, such as Members on the Watch List. --------------------------------------------------------------------------- \5\ Specific wrong-way risk is the risk that an exposure to a counterparty is highly likely to increase when the creditworthiness of that counterparty is deteriorating. See Principles for financial market infrastructures, issued by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions 47 n.65 (April 2012), available at http://www.bis.org/publ/cpss101a.pdf. \6\ As part of this proposal, NSCC proposes to define in its rules that, for a given Member, a family-issued security is a security that was issued by such Member or an affiliate of such Member. \7\ As part of its ongoing monitoring of its membership, NSCC utilizes an internal credit risk rating matrix to rate its risk exposures to its Members based on a scale from 1 (the strongest) to 7 (the weakest). Members that fall within the weakest three rating categories (i.e., 5, 6, and 7) are placed on NSCC's ``Watch List'' and, as provided under NSCC's Rules and Procedures (``Rules''), may be subject to enhanced surveillance or additional margin charges. See Section 4 of Rule 2B and Section I(B)(1) of Procedure XV of NSCC's Rules, available at http://dtcc.com/~/media/Files/Downloads/ legal/rules/nscc_rules.pdf. --------------------------------------------------------------------------- Currently, in calculating a Watch List Member's overall margin charge (i.e., a Watch List Member's required deposit to NSCC's clearing fund), NSCC excludes the Member's net, unsettled long position in family-issued securities from the volatility component of the margin calculation (``VaR Charge''). Instead, for such unsettled long positions, NSCC calculates the required margin (i.e., the FIS Charge) by multiplying the position value by a set percentage, which is determined based on a Member's rating on NSCC's internal credit risk rating matrix.\8\ NSCC applies this separate margin calculation to deal with specific wrong-way risk that arises from these positions because NSCC has to liquidate the unsettled family-issued security long positions in the Member's portfolio to manage the default.\9\ Given that the Member's default would likely adversely affect NSCC's ability to liquidate such positions at full value (because the value of the family-issued securities will decline in response to the Member's default), NSCC applies the FIS Charge to try to address the risk of a shortfall. According to NSCC, the FIS Charge constitutes a more conservative approach to collecting margin on family-issued security positions than what may be achieved by applying the VaR Charge, which does not recognize the relationship between the Member and the family- issued securities. --------------------------------------------------------------------------- \8\ More specifically, fixed-income securities that are family- issued securities are charged a rate of no less than 80 percent for firms that are rated 6 or 7 on the credit risk rating matrix, and no less than 40 percent for firms that are rated 5 on the credit risk rating matrix. Equity securities that are family-issued securities are charged a rate of 100 percent for firms that are rated 6 or 7 on the credit risk rating matrix, and no less than 50 percent for firms that are rated 5 on the credit risk rating matrix. \9\ In a default scenario, NSCC would receive the family-issued securities from a Member's guaranteed long transactions and would have to liquidate the holding to unwind NSCC's position. --------------------------------------------------------------------------- Although the risk of default by Members that are not on the Watch List is lower than Members on the Watch List, NSCC believes that it is appropriate to apply the FIS Charge to all Members because all Members' long positions in family-issued securities present specific wrong-way risk. However, the proposal would still maintain the relation between the FIS Charge and the Member's risk of default (i.e., the Member's credit risk), while at the same time addressing the difference in risk posed by equity and fixed-income securities. As such, NSCC proposes in the Advance Notice to apply the FIS Charge to fixed-income securities that are family-issued securities of non-Watch List Members at a rate of no less than 40 percent, and to equities that are family-issued securities of non-Watch [[Page 43055]] List Members at a rate of no less than 50 percent.\10\ --------------------------------------------------------------------------- \10\ According to NSCC, it calibrated the FIS Charge rates based on historical corporate-issue recovery-rate data. The rate applicable to equities is higher than the rate applicable to fixed- income securities because NSCC determined that equities present a greater risk than fixed-income securities of having a value at or near zero when a Member defaults. The Commission understands that NSCC calculated the 40 and 50 percent rates based on a weighted value of the probability of a Member defaulting and the potential loss that NSCC may realize when liquidating family-issued securities after a Member default. --------------------------------------------------------------------------- II. Discussion and Commission Findings Although the Clearing Supervision Act does not specify a standard of review for an advance notice, its stated purpose is instructive: To mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.\11\ Section 805(a)(2) of the Clearing Supervision Act \12\ authorizes the Commission to prescribe risk management standards for the payment, clearing, and settlement activities of designated clearing entities engaged in designated activities for which the Commission is the supervisory agency. Section 805(b) of the Clearing Supervision Act \13\ provides the following objectives and principles for the Commission's risk management standards prescribed under Section 805(a): --------------------------------------------------------------------------- \11\ See 12 U.S.C. 5461(b). \12\ 12 U.S.C. 5464(a)(2). \13\ 12 U.S.C. 5464(b). ---------------------------------------------------------------------------Promote robust risk management; promote safety and soundness; reduce systemic risks; and support the stability of the broader financial system. The Commission has adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act \14\ and Section 17A of the Exchange Act (``Rule 17Ad-22'').\15\ Rule 17Ad-22 requires registered clearing agencies to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis.\16\ Therefore, it is appropriate for the Commission to review proposed changes in advance notices against the objectives and principles of these risk management standards as described in Section 805(b) of the Clearing Supervision Act \17\ and against Rule 17Ad-22.\18\ --------------------------------------------------------------------------- \14\ 12 U.S.C. 5464(a)(2). \15\ 15 U.S.C. 78q-1. \16\ 17 CFR 240.17Ad-22. \17\ 12 U.S.C. 5464(b). \18\ 17 CFR 240.17Ad-22. --------------------------------------------------------------------------- The Commission believes the proposal in the Advance Notice is consistent with the objectives and principles described in Section 805(b) of the Act,\19\ and Rule 17Ad-22, in particular Rule 17Ad- 22(e)(4)(i) \20\ and Rule 17Ad-22(e)(6)(i) and (v) \21\ under the Exchange Act, as described in detail below. --------------------------------------------------------------------------- \19\ 12 U.S.C. 5464(b). \20\ 17 CFR 240.17Ad-22(e)(4)(i). \21\ 17 CFR 240.17Ad-22(e)(6)(i) and (v). --------------------------------------------------------------------------- A. Consistency With Section 805(b) of the Clearing Supervision Act As discussed below, the Commission believes that the changes proposed in the Advance Notice are consistent with Section 805(b) of the Clearing Supervision Act because they: (i) Are designed to reduce systemic risk; (ii) are designed to support the stability of the financial system; (iii) are designed to promote robust risk management; and (iv) are consistent with promoting safety and soundness. The Commission believes that the proposal is designed to help promote robust risk management. As described above, the FIS Charge is calculated and collected to help mitigate NSCC's loss exposure to specific wrong-way risk that NSCC may face when liquidating family- issued security positions that are depreciating in value in response to a Member's default. By expanding the FIS Charge to family-issued security transactions presented to NSCC by all Members, the proposal would assist NSCC in collecting margin and maintaining a clearing fund amount that more accurately reflects NSCC's overall risk exposure to its Members. Therefore, the proposal is designed to help better promote robust risk management at NSCC by reducing NSCC's loss exposure to the specific wrong-way risk that NSCC faces from Member transactions in family-issued securities. The Commission also believes that the proposal is designed to promote safety and soundness, as well as support the stability of the financial system, and reduce systemic risk. By providing for the collection by NSCC of margin amounts that contemplate and help address the specific wrong-way risk presented by all Members, the proposal would assist NSCC in helping to ensure that it maintains sufficient margin in the event that a Member holding family-issued securities defaults and such positions significantly decrease in value. Without this increased margin, NSCC is at a greater risk of not having enough margin to offset potential losses from the reduced value of family- issued securities in a default scenario. Such losses could threaten NSCC's ability to continue operations of its critical clearance and settlement services. Because the proposal would generally increase the level of financial resources available to NSCC, better enabling NSCC to continue operating in default scenarios, the proposal would help NSCC operate more safely and soundly and reduce the systemic risk associated with NSCC not providing critical clearance and settlement services in the event of a Member default. Therefore, the Commission believes that the changes proposed in the Advance Notice are consistent with Section 805(b) of the Clearing Supervision Act.\22\ --------------------------------------------------------------------------- \22\ Id. --------------------------------------------------------------------------- B. Consistency With Rule 17Ad-22(e)(4)(i) The Commission believes that the changes proposed in the Advance Notice are consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act, which requires, in part, that NSCC establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes, including by maintaining sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.\23\ --------------------------------------------------------------------------- \23\ 17 CFR 240.17Ad-22(e)(4)(i). --------------------------------------------------------------------------- As described above, NSCC is exposed to specific wrong-way risk where it acts as central counterparty for its Members for transactions in family-issued securities. The expanded application of the FIS Charge to all Members would help further mitigate NSCC's loss exposure to this risk. The charge is calculated and imposed based on the value and type of family-issued securities in each Member's portfolio and in consideration of the Members' credit rating, as calculated by NSCC's internal credit risk matrix. Although the FIS Charge may not fully reflect the recovery rate on a family-issue security when a Member defaults, the Commission understands that expanding the FIS Charge to non-Watch List Members, as proposed, would enable NSCC to collect more margin on such positions than would a VaR Charge, more accurately reflecting the risks those positions present. Thus, the [[Page 43056]] expanded FIS Charge is designed to help NSCC collect sufficient financial resources to help cover the specific risk exposure, with a high degree of confidence, which is presented by all Members seeking to clear and settle transactions in family-issued securities. Therefore, the Commission believes that the proposal to expand the FIS Charge to all Members is consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.\24\ --------------------------------------------------------------------------- \24\ Id. --------------------------------------------------------------------------- C. Consistency With Rule 17Ad-22(e)(6)(i) and (v) The Commission believes that the changes proposed in the Advance Notice are consistent with Rule 17Ad-22(e)(6)(i) and (v) under the Exchange Act, which require, in part, that NSCC establish, implement, maintain and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, at a minimum considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market; and uses an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products.\25\ --------------------------------------------------------------------------- \25\ 17 CFR 240.17Ad-22(e)(6)(i) and (v). --------------------------------------------------------------------------- As described above, NSCC faces specific wrong-way risk where it acts as central counterparty to Member transactions in family-issued securities. To help address this risk, NSCC applies the FIS Charge in calculating the Member's required margin. Specifically, the FIS Charge is a component of the margin 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 FIS Charge is tailored to consider both the value and type of family-issued securities held by the Member, as well as the credit risk presented by the Member, as calculated by NSCC. However, currently, the FIS Charge is assessed only against Members on the Watch List because of the additional credit risk presented by such Members. Nevertheless, all Members, not just Members on the Watch List, present specific wrong-way risk. As such, NSCC proposes to expand the FIS Charge to all Members, while maintaining the relation between the FIS Charge and the Member's credit risk. Specifically, NSCC proposes to apply the FIS Charge to fixed-income securities that are family-issued securities of non-Watch List Members at a rate of no less than 40 percent, and to equities that are family-issued securities of non-Watch List Members at a rate of no less than 50 percent. Although NSCC proposes to apply a lesser percentage rate to non-Watch List Members than some Watch List Members, the proposed rate is designed to more accurately reflect the risks posed than what is reflected in a VaR Charge. Because the expanded FIS Charge also would be a tailored component of the margin that NSCC collects from non-Watch List Members to help cover NSCC credit exposure to such Members, as the charge would be based on different product risk factors with respect to equity and fixed-income securities, as described above, the Commission believes that the proposed changes in the Advance Notice are consistent with Rule 17Ad-22(e)(6)(i) and (v) under the Exchange Act.\26\ --------------------------------------------------------------------------- \26\ Id. --------------------------------------------------------------------------- III. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Clearing Supervision Act,\27\ that the Commission does not object to Advance Notice (SR-NSCC-2017-804) and that NSCC is authorized to implement the proposed change as of the date of this notice or the date of an order by the Commission approving the proposed rule change (SR- NSCC-2017-010) that reflects rule changes that are consistent with this Advance Notice, whichever is later. --------------------------------------------------------------------------- \27\ 12 U.S.C. 5465(e)(1)(I). By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-19375 Filed 9-12-17; 8:45 am] BILLING CODE 8011-01-P
![43054 Federal Register / Vol. 82, No. 176 / Wednesday, September 13, 2017 / Notices
Additional Information or Comments: Commission did not receive any excludes the Member’s net, unsettled
Copies of the forms and supporting comments on the Advance Notice. This long position in family-issued securities
documents can be obtained from Dana publication serves as notice that the from the volatility component of the
Hickman at (312) 751–4981 or Commission does not object to the margin calculation (‘‘VaR Charge’’).
Dana.Hickman@RRB.GOV. changes set forth in the Advance Notice. Instead, for such unsettled long
Comments regarding the information positions, NSCC calculates the required
collection should be addressed to Brian I. Description of the Advance Notice
margin (i.e., the FIS Charge) by
Foster, Railroad Retirement Board, 844 The Advance Notice is a proposal by multiplying the position value by a set
North Rush Street, Chicago, Illinois, NSCC to further address specific wrong- percentage, which is determined based
60611–1275 or Brian.Foster@rrb.gov and way risk 5 that is present when NSCC on a Member’s rating on NSCC’s
to the OMB Desk Officer for the RRB, acts as central counterparty to a
internal credit risk rating matrix.8 NSCC
Fax: 202–395–6974, Email address: transaction with an NSCC member
applies this separate margin calculation
OIRA_Submission@omb.eop.gov. (‘‘Member’’) where the underlying
to deal with specific wrong-way risk
securities are securities issued by such
Brian D. Foster,
Member or an affiliate of such Member that arises from these positions because
Clearance Officer. (‘‘family-issued securities’’).6 Currently, NSCC has to liquidate the unsettled
[FR Doc. 2017–19442 Filed 9–12–17; 8:45 am] NSCC applies a targeted margin charge family-issued security long positions in
BILLING CODE 7905–01–P to address the specific wrong-way risk the Member’s portfolio to manage the
of family-issued securities transactions default.9 Given that the Member’s
(‘‘FIS Charge’’) where the Member is on default would likely adversely affect
SECURITIES AND EXCHANGE NSCC’s Watch List.7 NSCC believes that NSCC’s ability to liquidate such
COMMISSION Members on the Watch List present a positions at full value (because the
higher credit risk (i.e., a greater risk of value of the family-issued securities will
[Release No. 34–81545; File No. SR–NSCC–
2017–804] defaulting on their settlement decline in response to the Member’s
obligations), compared to Members not default), NSCC applies the FIS Charge to
Self-Regulatory Organizations; on the Watch List. As such, the family- try to address the risk of a shortfall.
National Securities Clearing issued securities of Members on the According to NSCC, the FIS Charge
Corporation; Notice of No Objection to Watch List currently receive a FIS constitutes a more conservative
an Advance Notice To Expand the Charge because of the increased credit approach to collecting margin on
Application of the Family-Issued risk presented by such Members. As family-issued security positions than
Securities Charge described in detail below, NSCC what may be achieved by applying the
proposes in the Advance Notice to VaR Charge, which does not recognize
September 7, 2017.
expand the application of the FIS the relationship between the Member
On July 10, 2017, National Securities Charge to all Members, regardless of a and the family-issued securities.
Clearing Corporation (‘‘NSCC’’) filed Member’s Watch List status, but still
with the Securities and Exchange Although the risk of default by
maintain a higher FIS Charge for Members that are not on the Watch List
Commission (‘‘Commission’’) advance Members that present a greater credit
notice SR–NSCC–2017–804 (‘‘Advance is lower than Members on the Watch
risk to NSCC, such as Members on the List, NSCC believes that it is appropriate
Notice’’) pursuant to Section 806(e)(1) of Watch List.
Title VIII of the Dodd-Frank Wall Street to apply the FIS Charge to all Members
Currently, in calculating a Watch List
Reform and Consumer Protection Act because all Members’ long positions in
Member’s overall margin charge (i.e., a
entitled the Payment, Clearing, and Watch List Member’s required deposit family-issued securities present specific
Settlement Supervision Act of 2010 to NSCC’s clearing fund), NSCC wrong-way risk. However, the proposal
(‘‘Clearing Supervision Act’’) 1 and Rule would still maintain the relation
19b–4(n)(1)(i) 2 under the Securities (July 25, 2017), 82 FR 35563 (July 31, 2017) (SR– between the FIS Charge and the
Exchange Act of 1934 (‘‘Exchange NSCC–2017–010). The Commission did not receive Member’s risk of default (i.e., the
Act’’).3 The Advance Notice was any comments on that proposal. Member’s credit risk), while at the same
5 Specific wrong-way risk is the risk that an
published for comment in the Federal time addressing the difference in risk
exposure to a counterparty is highly likely to
Register on August 8, 2017.4 The increase when the creditworthiness of that posed by equity and fixed-income
counterparty is deteriorating. See Principles for securities. As such, NSCC proposes in
1 12 U.S.C. 5465(e)(1). The Financial Stability
financial market infrastructures, issued by the the Advance Notice to apply the FIS
Oversight Council designated NSCC a systemically Committee on Payment and Settlement Systems and
important financial market utility on July 18, 2012.
Charge to fixed-income securities that
the Technical Committee of the International
See Financial Stability Oversight Council 2012 Organization of Securities Commissions 47 n.65 are family-issued securities of non-
Annual Report, Appendix A, http:// (April 2012), available at http://www.bis.org/publ/ Watch List Members at a rate of no less
www.treasury.gov/initiatives/fsoc/Documents/2012 cpss101a.pdf. than 40 percent, and to equities that are
%20Annual%20Report.pdf. Therefore, NSCC is 6 As part of this proposal, NSCC proposes to
required to comply with the Clearing Supervision family-issued securities of non-Watch
define in its rules that, for a given Member, a
Act and file advance notices with the Commission. family-issued security is a security that was issued
See 12 U.S.C. 5465(e). by such Member or an affiliate of such Member. 8 More specifically, fixed-income securities that
2 17 CFR 240.19b–4(n)(1)(i). 7 As part of its ongoing monitoring of its are family-issued securities are charged a rate of no
3 15 U.S.C. 78s(b)(1). less than 80 percent for firms that are rated 6 or 7
membership, NSCC utilizes an internal credit risk
4 Securities Exchange Act Release No. 81286 rating matrix to rate its risk exposures to its on the credit risk rating matrix, and no less than
(August 2, 2017), 82 FR 37141 (August 8, 2017) Members based on a scale from 1 (the strongest) to 40 percent for firms that are rated 5 on the credit
sradovich on DSK3GMQ082PROD with NOTICES
(SR–NSCC–2017–804) (‘‘Notice’’). NSCC also filed a 7 (the weakest). Members that fall within the risk rating matrix. Equity securities that are family-
related proposed rule change with the Commission weakest three rating categories (i.e., 5, 6, and 7) are issued securities are charged a rate of 100 percent
pursuant to Section 19(b)(1) of the Exchange Act placed on NSCC’s ‘‘Watch List’’ and, as provided for firms that are rated 6 or 7 on the credit risk
and Rule 19b–4 thereunder, seeking approval of under NSCC’s Rules and Procedures (‘‘Rules’’), may rating matrix, and no less than 50 percent for firms
changes to its rules necessary to implement the be subject to enhanced surveillance or additional that are rated 5 on the credit risk rating matrix.
Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR margin charges. See Section 4 of Rule 2B and 9 In a default scenario, NSCC would receive the
240.19b–4, respectively. The proposed rule change Section I(B)(1) of Procedure XV of NSCC’s Rules, family-issued securities from a Member’s
was published in the Federal Register on July 31, available at http://dtcc.com/∼/media/Files/ guaranteed long transactions and would have to
2017. Securities Exchange Act Release No. 81203 Downloads/legal/rules/nscc_rules.pdf. liquidate the holding to unwind NSCC’s position.
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expanded FIS Charge is designed to family-issued securities of non-Watch (‘‘OMB’’) a request for approval of
help NSCC collect sufficient financial List Members at a rate of no less than extension of the previously approved
resources to help cover the specific risk 40 percent, and to equities that are collection of information provided for in
exposure, with a high degree of family-issued securities of non-Watch Rule 10b–17 (17 CFR 240.10b–17),
confidence, which is presented by all List Members at a rate of no less than under the Securities Exchange Act of
Members seeking to clear and settle 50 percent. Although NSCC proposes to 1934 (15 U.S.C 78a et seq.).
transactions in family-issued securities. apply a lesser percentage rate to non- Rule 10b–17 requires any issuer of a
Therefore, the Commission believes that Watch List Members than some Watch class of securities publicly traded by the
the proposal to expand the FIS Charge List Members, the proposed rate is use of any means or instrumentality of
to all Members is consistent with Rule designed to more accurately reflect the interstate commerce or of the mails or
17Ad–22(e)(4)(i) under the Exchange risks posed than what is reflected in a of any facility of any national securities
Act.24 VaR Charge. exchange to give notice of the following
Because the expanded FIS Charge also specific distributions relating to such
C. Consistency With Rule 17Ad– class of securities: (1) A dividend or
22(e)(6)(i) and (v) would be a tailored component of the
margin that NSCC collects from non- other distribution in cash or in kind
The Commission believes that the Watch List Members to help cover other than interest payments on debt
changes proposed in the Advance NSCC credit exposure to such Members, securities; (2) a stock split or reverse
Notice are consistent with Rule 17Ad– as the charge would be based on stock split; or (3) a rights or other
22(e)(6)(i) and (v) under the Exchange different product risk factors with subscription offering. Notice shall be
Act, which require, in part, that NSCC respect to equity and fixed-income either given to the Financial Industry
establish, implement, maintain and securities, as described above, the Regulatory Authority, Inc. as successor
enforce written policies and procedures Commission believes that the proposed to the National Association of Securities
reasonably designed to cover its credit changes in the Advance Notice are Dealers, Inc. or in accordance with the
exposures to its participants by consistent with Rule 17Ad–22(e)(6)(i) procedures of the national securities
establishing a risk-based margin system and (v) under the Exchange Act.26 exchange upon which the securities are
that, at a minimum considers, and registered. The Commission may
produces margin levels commensurate III. Conclusion exempt an issuer of over-the-counter
with, the risks and particular attributes It is therefore noticed, pursuant to (but not listed) securities from the
of each relevant product, portfolio, and Section 806(e)(1)(I) of the Clearing notice requirement. The requirements of
market; and uses an appropriate method Supervision Act,27 that the Commission 10b–17 do not apply to redeemable
for measuring credit exposure that does not object to Advance Notice (SR– securities of registered open-end
accounts for relevant product risk NSCC–2017–804) and that NSCC is investment companies or unit
factors and portfolio effects across authorized to implement the proposed investment trusts.
products.25 change as of the date of this notice or The information required by Rule
As described above, NSCC faces the date of an order by the Commission 10b–17 is necessary for the execution of
specific wrong-way risk where it acts as approving the proposed rule change the Commission’s mandate under the
central counterparty to Member (SR–NSCC–2017–010) that reflects rule Securities Exchange Act of 1934 to
transactions in family-issued securities. changes that are consistent with this prevent fraudulent, manipulative, and
To help address this risk, NSCC applies Advance Notice, whichever is later. deceptive acts and practices. The
the FIS Charge in calculating the Commission has found that not
Member’s required margin. Specifically, By the Commission. requiring formal notices of the types of
the FIS Charge is a component of the Eduardo A. Aleman, distributions covered by Rule 10b–17
margin that NSCC calculates and Assistant Secretary. has led to a number of abuses including
collects using a risk-based margin [FR Doc. 2017–19375 Filed 9–12–17; 8:45 am] purchasers not being aware of their
methodology that is designed to help BILLING CODE 8011–01–P rights to such distributions. It is only
maintain the coverage of NSCC’s credit through formal notice of the
exposures to its Members at a distribution, including the date of the
confidence level of at least 99 percent. SECURITIES AND EXCHANGE distribution, that current holders,
The FIS Charge is tailored to consider COMMISSION potential buyers, or potential sellers of
both the value and type of family-issued the securities at issue will know their
securities held by the Member, as well Submission for OMB Review; rights to the distribution. Therefore, it is
as the credit risk presented by the Comment Request only through formal notice that
Member, as calculated by NSCC. Upon Written Request, Copies Available investors can make an informed
However, currently, the FIS Charge is From: Securities and Exchange decision as to whether to buy or sell a
assessed only against Members on the Commission, Office of FOIA Services, security.
Watch List because of the additional There are approximately 12,127
100 F Street NE., Washington, DC
credit risk presented by such Members. respondents per year. These
20549–2736.
Nevertheless, all Members, not just respondents make approximately 27,144
Members on the Watch List, present Extension: Rule 10b–17, SEC File No. 270– responses per year. Each response takes
specific wrong-way risk. As such, NSCC 427, OMB Control No. 3235–0476. approximately 10 minutes to complete.
proposes to expand the FIS Charge to all Notice is hereby given that pursuant Thus, the total compliance burden per
sradovich on DSK3GMQ082PROD with NOTICES
Members, while maintaining the to the Paperwork Reduction Act of 1995 year is 4,524 burden hours. The total
relation between the FIS Charge and the (‘‘PRA’’) (44 U.S.C. 3501 et seq.), the internal labor cost of compliance for the
Member’s credit risk. Specifically, Securities and Exchange Commission respondents, associated with producing
NSCC proposes to apply the FIS Charge (‘‘Commission’’) has submitted to the and filing the reports, is approximately
to fixed-income securities that are Office of Management and Budget $317,991.96.
An agency may not conduct or
24 Id. 26 Id. sponsor, and a person is not required to
25 17 CFR 240.17Ad–22(e)(6)(i) and (v). 27 12 U.S.C. 5465(e)(1)(I). respond to, a collection of information
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Document Created: 2017-09-13 00:09:20
Document Modified: 2017-09-13 00:09:20
| 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 43054 |
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