83 FR 9035 - Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection To Advance Notice Filing, as Modified by Amendment No. 1, To Enhance the Calculation of the Volatility Component of the Clearing Fund Formula That Utilizes a Parametric Value-at-Risk Model and Eliminate the Market Maker Domination Charge
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 42 (March 2, 2018)
Federal Register Volume 83, Issue 42 (March 2, 2018)
| Page Range | 9035-9039 | |
| FR Document | 2018-04237 |
[Federal Register Volume 83, Number 42 (Friday, March 2, 2018)] [Notices] [Pages 9035-9039] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-04237] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-82780; File No. SR-NSCC-2017-808] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection To Advance Notice Filing, as Modified by Amendment No. 1, To Enhance the Calculation of the Volatility Component of the Clearing Fund Formula That Utilizes a Parametric Value-at-Risk Model and Eliminate the Market Maker Domination Charge February 26, 2018. National Securities Clearing Corporation (``NSCC'') filed with the U.S. Securities and Exchange Commission (``Commission'') on December 28, 2017 the advance notice SR-NSCC-2017-808 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, as amended (``Exchange Act''). On January 10, 2018, NSCC filed Amendment No. 1 to the advance notice.\3\ The advance notice, as modified by Amendment No. 1 (hereinafter, the ``Advance Notice'') was published for comment in the Federal Register on February 8, 2018.\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 Payment, Clearing and Settlement 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\ In Amendment No. 1 to the advance notice, NSCC amended and replaced in its entirety the originally filed confidential Exhibit 3a with a new confidential Exhibit 3a in order to remove references to a practice that was not intended for consideration as part of the filing. \4\ Securities Exchange Act Release No. 82631 (February 5, 2018), 83 FR 5658 (February 8, 2017) (SR-NSCC-2017-808) (``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 January 19, 2018. Securities Exchange Act Release No. 82494 (January 12, 2018), 83 FR 2828 (January 19, 2018) (SR-NSCC-2017-020). The Commission did not receive any comments on that proposal. --------------------------------------------------------------------------- I. Description of the Advance Notice The Advance Notice consists of changes to NSCC's Rules & Procedures (``Rules'') \5\ that would enhance NSCC's method for calculating the daily margin requirement for each NSCC member (``Member'').\6\ Specifically, NSCC proposes to (1) add three new ways to calculate the volatility component of its Members' margin requirements, and (2) eliminate an outdated component of the margin calculation, as described more fully below.\7\ NSCC states that the new volatility component calculations would enable NSCC to mitigate the credit risks presented by Member portfolios in a broader range of scenarios and market conditions than NSCC's current volatility component calculation.\8\ --------------------------------------------------------------------------- \5\ NSCC's Rules, available at http://dtcc.com/~/media/Files/ Downloads/legal/rules/nscc_rules.pdf. \6\ Notice, 83 FR at 5659. \7\ Id. \8\ Id. --------------------------------------------------------------------------- A key tool that NSCC uses to manage its credit exposures to Members is the daily calculation and collection of margin from each Member (``Required Deposit'').\9\ NSCC collects Required Deposits from Members to mitigate NSCC's potential losses associated with the liquidation of a Member's portfolio should the Member default.\10\ The aggregate of all Members' Required Deposits constitutes NSCC's Clearing Fund, which NSCC can access should a defaulting Member's own Required Deposit be insufficient to satisfy NSCC's losses caused by the liquidation of the Member's portfolio.\11\ --------------------------------------------------------------------------- \9\ Id. \10\ Id. \11\ Id. --------------------------------------------------------------------------- A. Evenly-Weighted Volatility Estimation Each Member's Required Deposit consists of several components.\12\ Generally, the largest component of a Member's Required Deposit is the volatility component, which is designed to capture the market price risk associated with each Member's portfolio at a 99th percentile level of confidence.\13\ NSCC currently calculates the volatility component using a parametric Value-at-Risk (``VaR'') model.\14\ NSCC's current VaR calculation places more emphasis on recent market observations (such as recent price history) for the purpose of estimating current market price volatility levels, based on the assumption that the most recent price history is more relevant and accurate for measuring current market price volatility levels (referred to as an ``exponentially-weighted volatility estimation'').\15\ However, volatility in the equity markets often rapidly reverts to more commonly observed levels, followed by a subsequent spike.\16\ While a VaR calculation that applies exclusively an exponentially-weighted volatility estimation can capture sudden increases in volatility, it may result in a swift decline in margin that does not adequately capture the risks related to a rapid decrease in market price volatility levels.\17\ NSCC proposes to mitigate this shortcoming by adding another method for computing the VaR calculation that does not diminish the value of older market observations.\18\ Specifically, NSCC proposes to add a VaR calculation that gives equal weight to all historical volatility observations during a specified look-back period (referred to by NSCC as an ``evenly-weighted volatility estimation''),\19\ which could [[Page 9036]] result in margin requirement amounts during non-volatile periods greater than margin requirement amounts based upon the exponentially- weighted volatility estimation.\20\ Under the proposal, NSCC would calculate both the exponentially-weighted volatility estimation and the evenly-weighted volatility estimation, and the greater result would represent the ``Core Parametric Estimation.'' \21\ --------------------------------------------------------------------------- \12\ See Procedure XV (Clearing Fund Formula and Other Matters) of the Rules, supra note 5. \13\ Notice, 83 FR at 5659-60. \14\ Notice, 83 FR at 5660. \15\ Id. \16\ Id. \17\ Id. \18\ Id. \19\ Id. \20\ Id. \21\ Notice, 83 FR at 5661. --------------------------------------------------------------------------- B. Gap Risk Measure In addition to the Core Parametric Estimation, NSCC proposes to add a second method for determining the volatility component of a Member's Required Deposit.\22\ This second method, referred to as the Gap Risk Measure, would help address risks that are unique to Member portfolios that hold a concentrated position in a specific security.\23\ More specifically, when a Member's portfolio holds a concentrated position in a specific security, such that the position represents a significant percentage of the entire portfolio's value, the portfolio may be more susceptible to risks associated with issuer-specific events affecting the price of the concentrated security.\24\ Such events include earning reports, management changes, merger announcements, insolvency, or other unexpected issuer-specific events (collectively, ``Gap Risk Events'').\25\ --------------------------------------------------------------------------- \22\ Id. \23\ Id. \24\ Id. \25\ Id. --------------------------------------------------------------------------- NSCC has observed that portfolios with a concentration level of more than 30 percent in a specific security tend to have backtesting coverage below the 99 percent confidence level.\26\ To mitigate the concentration risk posed by such portfolios, NSCC proposes the Gap Risk Measure, which would apply to all individual equities in a Member's portfolio, but only when the Member holds a position in a security that meets a 30 percent concentration threshold relative to the remainder of the portfolio.\27\ --------------------------------------------------------------------------- \26\ Id. \27\ Id. --------------------------------------------------------------------------- NSCC also has observed that exchange-traded products (``ETPs'') that track to a broad market index are generally not susceptible to Gap Risk Events.\28\ Accordingly, NSCC would not apply the Gap Risk Measure to positions in such index-based ETPs, even if the 30 percent concentration threshold is met.\29\ However, non-index-based ETPs and index-based ETPs that track a narrow market index are susceptible to Gap Risk Events, and would, therefore, be subject to the Gap Risk Measure, provided that the 30 percent concentration threshold is met.\30\ --------------------------------------------------------------------------- \28\ Id. \29\ Id. \30\ Id. NSCC states that it would use a third-party market provider to identify index-based ETPs. Id. The third-party market provider would identify index-based ETPs as those with criteria that require the portfolio returns to track to a broad market index. Id. ETPs that do not meet this criteria would not be considered index- based ETPs and, therefore, would be included in the Gap Risk Measure calculation. Id. --------------------------------------------------------------------------- When applicable, NSCC would calculate the Gap Risk Measure by multiplying the gross market value of the largest (non-index) position in the portfolio by a percent of not less than 10 percent.\31\ --------------------------------------------------------------------------- \31\ Id. NSCC would determine such percent empirically as no less than the larger of the 1st and 99th percentiles of three-day returns of a set of CUSIPs that are subject to the volatility component, giving equal rank to each to determine which has the highest movement over that three-day period. Id. NSCC would use a look-back period of not less than ten years that includes a one-year stress period. Id. If the one-year stress period overlaps with the look-back period, only the non-overlapping period would be combined with the look-back period. Id. The result would then be rounded up to the nearest whole percentage. Id. --------------------------------------------------------------------------- C. Portfolio Margin Floor In addition to the Core Parametric Estimation and the Gap Risk Measure, NSCC proposes to add a third method for determining the volatility component of a Member's Required Deposit.\32\ This third method, referred to as the Portfolio Margin Floor, would help address risks that may not be adequately accounted for by the Core Parametric Estimation or the Gap Risk Measure.\33\ For example, a volatility component based solely on a parametric VaR model calculation may prove inadequate where there is low market price volatility and the portfolio holds either large gross market values or large net directional market values.\34\ In such cases, the model may not collect sufficient margin, which could hinder NSCC's ability to effectively liquidate or hedge the Member's portfolio in three business days.\35\ --------------------------------------------------------------------------- \32\ Notice, 83 FR at 5661. \33\ Id. \34\ Notice, 83 FR at 5662. \35\ Id. --------------------------------------------------------------------------- NSCC proposes the Portfolio Margin Floor to operate as a floor to (i.e., minimum amount of) a Member's volatility component.\36\ Specifically, the Portfolio Margin Floor would be based on the balance and direction of the positions in the Member's portfolio and would be designed to be proportional to the market value of the portfolio.\37\ --------------------------------------------------------------------------- \36\ Id. \37\ Id. --------------------------------------------------------------------------- The Portfolio Margin Floor would be the sum of two separate calculations, both of which would measure the market value of the portfolio based on the direction of net positions in the portfolio.\38\ First, NSCC would calculate the net directional market value of the portfolio by calculating the absolute difference between the market value of the long positions and shorts positions in the portfolio,\39\ then multiplying that amount by a percentage.\40\ Second, NSCC would calculate the balanced market value of the portfolio by taking the lowest market value of either the long or short positions in the portfolio,\41\ then multiplying that value by a percentage.\42\ The combined results of these two calculations would constitute the final Portfolio Margin Floor amount.\43\ --------------------------------------------------------------------------- \38\ Id. \39\ For example, if the market value of the long positions is $100,000, and the market value of the short positions is $200,000, the net directional market value of the portfolio would be $100,000. Id. \40\ Id. NSCC would determine the applicable percentage by examining the annual historical volatility levels of benchmark indices over a historical look-back period. Id. \41\ For example, if the market value of the long positions is $100,000, and the market value of the short positions is $110,000, the balanced market value of the portfolio would be $100,000. Id. \42\ Id. NSCC would determine the applicable percentage to be an amount that covers the transaction costs and other relevant risks associated with the positions in the portfolio. Id. \43\ Id. --------------------------------------------------------------------------- Finally, in order to choose the amount to be charged as the volatility component of a Member's Required Deposit, NSCC would compare the amounts calculated by the Portfolio Margin Floor, the Gap Risk Measure (if applicable), and the Core Parametric Estimation. NSCC then would use the highest of those three calculations as the volatility component of the Member's Required Deposit.\44\ --------------------------------------------------------------------------- \44\ Id. --------------------------------------------------------------------------- D. Elimination of the Market Maker Domination Component NSCC proposes to eliminate the Market Maker Domination Component (``MMD Charge'') from its Clearing Fund formula.\45\ The MMD Charge is an existing component of the Clearing Fund formula calculated for Members that are Market Makers and Members that clear for Market Makers.\46\ The MMD Charge was developed to address the risks presented by concentrated positions (of the overall unsettled long position in the security) held by Market Makers.\47\ More specifically, the charge [[Page 9037]] is designed to address securities that are susceptible to marketability and liquidation impairment because of the relative size of the positions that NSCC would have to liquidate or hedge in the case of a Market Maker default.\48\ --------------------------------------------------------------------------- \45\ Id. \46\ Id; see also Procedure XV, Section I(A)(1)(d) of the Rules, supra note 5. \47\ Notice, 83 FR at 5662. \48\ Id. --------------------------------------------------------------------------- Under the current Rules, NSCC may impose the MMD Charge if the Market Maker (either the Member or the correspondent of the Member) holds a position that is greater than 40 percent of the overall unsettled long position (i.e., the sum of each clearing broker's net long position) in a specific security.\49\ NSCC calculates the MMD Charge as the sum of each of the absolute values of the net positions in the relevant securities, less the reported amount of excess net capital for that Member.\50\ --------------------------------------------------------------------------- \49\ Id. \50\ Id. NSCC does not apply the excess net capital offset for Members with the weakest credit rating (i.e. 7) on the Credit Risk Rating Matrix. See Procedure XV, Sections I(A)(1)(d) and I(A)(2)(c) of the Rules, supra note 5. --------------------------------------------------------------------------- NSCC states that since implementation of the MMD Charge, several developments in the U.S. equity markets (e.g., improved price transparency, access across exchange venues, and participation by market liquidity providers) have reduced the risks that the MMD Charge was designed to address.\51\ NSCC further states that the MMD Charge may not effectively address concentration risk because the MMD Charge (1) only applies to positions in certain securities, as described above, (2) does not address concentration risk presented by positions in securities that are not listed on NASDAQ or in securities traded by firms that are not Market Makers, and (3) does not account for concentration in market capitalization categories.\52\ NSCC states that the proposed Gap Risk Measure would provide better concentration risk coverage than the MMD Charge because the former would apply to all Members, whereas the latter only applies to Market Makers.\53\ --------------------------------------------------------------------------- \51\ Notice, 83 FR at 5662. \52\ Id. \53\ Id. --------------------------------------------------------------------------- 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.\54\ --------------------------------------------------------------------------- \54\ See 12 U.S.C. 5461(b). --------------------------------------------------------------------------- Section 805(a)(2) of the Clearing Supervision Act \55\ authorizes the Commission to prescribe regulations containing 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 \56\ provides the following objectives and principles for the Commission's risk-management standards prescribed under Section 805(a): --------------------------------------------------------------------------- \55\ 12 U.S.C. 5464(a)(2). \56\ 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. Section 805(c) of the Clearing Supervision Act provides, in addition, that the Commission's risk-management standards may address such areas as risk-management and default policies and procedures, among others areas.\57\ --------------------------------------------------------------------------- \57\ 12 U.S.C. 5464(c). --------------------------------------------------------------------------- The Commission has adopted risk-management standards under Section 805(a)(2) of the Clearing Supervision Act \58\ and Section 17A of the Exchange Act (``Rule 17Ad-22'').\59\ Rule 17Ad-22 requires each covered clearing agency, among other things, 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.\60\ Therefore, it is appropriate for the Commission to review proposed changes in advance notices for consistency with the objectives and principles of the risk- management standards described in Section 805(b) of the Clearing Supervision Act \61\ and against Rule 17Ad-22.\62\ --------------------------------------------------------------------------- \58\ 12 U.S.C. 5464(a)(2). \59\ 15 U.S.C. 78q-1. \60\ 17 CFR 240.17Ad-22. \61\ 12 U.S.C. 5464(b). \62\ 17 CFR 240.17Ad-22. --------------------------------------------------------------------------- A. Consistency With Section 805(b) of the Clearing Supervision Act The Commission believes that the changes proposed in the Advance Notice are consistent with each of the objectives and principles described in Section 805(b) of the Act.\63\ Specifically, as discussed below, the Commission believes that the changes proposed in the Advance Notice are consistent with promoting robust risk management in the area of credit risk and promoting safety and soundness, which in turn, would help reduce systemic risk and support the stability of the broader financial system. --------------------------------------------------------------------------- \63\ 12 U.S.C. 5464(b). --------------------------------------------------------------------------- The Commission believes that the proposed changes promote robust risk management by adding three new volatility component calculations that would better enable NSCC to mitigate the credit risks presented by Member portfolios in a broader range of scenarios and market conditions than NSCC's current volatility component calculation. First, as described above, NSCC currently calculates the volatility component of each Member's Required Deposit using a VaR calculation that relies exclusively on an exponentially-weighted volatility estimation. However, the current VaR calculation places more emphasis on recent market observations, which may result in a swift decline in margin that does not adequately capture the risks related to a rapid decrease in market price volatility levels. To address this shortcoming, NSCC proposes to (1) add a VaR calculation that relies on an evenly-weighted volatility estimation (i.e., that gives equal weight to all historical volatility observations during a specified look-back period), (2) compare the amounts of both VaR calculations (i.e., based on both evenly- and exponentially-weighted volatility estimations), and (3) use the greater amount as the Core Parametric Estimation. Accordingly, the Commission believes adding the VaR calculation based on an evenly-weighted volatility estimation would enable NSCC to more effectively limit its credit exposure to Members in market conditions that reflect a rapid decrease in market price volatility levels. Second, as described above, when a Member's portfolio holds a concentrated position in a specific security beyond a significant percentage of the entire portfolio's value, the portfolio may be more susceptible to Gap Risk Events. In such a scenario, NSCC's current volatility component calculation may result in inadequate margin coverage. To address this issue, NSCC has proposed the Gap Risk Measure as an alternative volatility component calculation. The Gap Risk Measure is designed to provide better margin coverage in such a scenario as it would apply to all individual equities (including non- index-based and narrow-index-based ETPs, as described above) when a Member maintains a position in its portfolio that exceeds the 30 percent [[Page 9038]] concentration threshold. Accordingly, the Commission believes adding the Gap Risk Measure would enable NSCC to more effectively limit its credit exposure to Members in certain scenarios in which a Member holds a security that meets the 30 percent concentration threshold relative to the remainder of its portfolio. Third, as described above, when a Member's portfolio holds either large gross market values or large net directional market values in a period of low market price volatility, NSCC's current volatility component calculation may not result in adequate margin, which could hinder NSCC's ability to effectively liquidate or hedge the Member's portfolio in the event of the Member's default. To address this concern, NSCC proposes the Portfolio Margin Floor, which would operate as a floor to (i.e., minimum amount of) the volatility component of a Member's Required Deposit. Accordingly, the Commission believes adding the Portfolio Margin Floor would enable NSCC to more effectively limit its credit exposure to Members in certain scenarios, such as when a Member's portfolio holds either large gross market values or large net directional market values and market prices exhibit low volatility. Finally, to help ensure that the amount of margin that NSCC collects as the volatility component of a Member's Required Deposit would help mitigate each of the specific concerns addressed by the Core Parametric Estimation, Gap Risk Measure, and Portfolio Margin Floor, NSCC would assess the largest amount of those three calculations as the volatility component of the Member's Required Deposit. In addition to the three proposed volatility component calculations, NSCC also proposes to eliminate the MMD Charge. As described above, NSCC has found the MMD Charge to be an inefficient and ineffective component of the Clearing Fund formula that may not accurately capture the credit risk presented by a Member's portfolio. More specifically, the charge does not cover a range of scenarios and market conditions that would be covered by the proposed Gap Risk Measure. Moreover, in contrast to the proposed Gap Risk Measure, the MMD Charge (1) only applies to positions in certain securities, (2) does not address concentration risk presented by positions in securities that are not listed on NASDAQ, (3) does not account for concentration in market capitalization categories, and (4) only applies to Market Makers. Accordingly, NSCC's proposal to eliminate the MMD Charge is designed to remove an obsolete component from the Clearing Fund formula. Taken together, each of the above described changes would enhance NSCC's current method for calculating each Member's volatility component, enabling NSCC to produce margin levels more commensurate with the risks associated with its Members' portfolios in a broader range of scenarios and market conditions, and, thus, more effectively cover its credit exposure to its Members. Therefore, the Commission believes the changes proposed in the Advance Notice are consistent with promoting robust risk management, consistent with Section 805(b) of the Clearing Supervision Act.\64\ --------------------------------------------------------------------------- \64\ Id. --------------------------------------------------------------------------- The Commission also believes that the proposed changes would promote safety and soundness at NSCC, which, in turn, would help reduce systemic risk and support the stability of the broader financial system. As described above, the proposed changes are designed to better limit NSCC's credit exposure to Members in the event of a Member default. More specifically, the proposed VaR calculation based on an evenly-weighted volatility estimation would enable NSCC to better manage its credit exposure to Members in market conditions that reflect a rapid decrease in market price volatility levels. Meanwhile, the proposed Gap Risk Measure would enable NSCC to manage its credit exposure to Member portfolios that are more susceptible to Gap Risk Events. Finally, the proposed Portfolio Margin Floor would enable NSCC to better manage its credit exposure to Members in certain scenarios, such as low market price volatility when a Member's portfolio holds either large gross market values or large net directional market values. By better limiting credit exposure to its Members, NSCC's proposed changes are designed to help ensure that, in the event of a Member default, NSCC's operations would not be disrupted and non-defaulting Members would not be exposed to losses that they cannot anticipate or control. As such, the Commission finds that the proposed changes would promote safety and soundness, which in turn, would reduce systemic risks and support the stability of the broader financial system, consistent with Section 805(b) of the Clearing Supervision Act.\65\ --------------------------------------------------------------------------- \65\ Id. --------------------------------------------------------------------------- Therefore, the Commission believes that the changes proposed in the Advance Notice are consistent with Section 805(b) of the Clearing Supervision Act.\66\ --------------------------------------------------------------------------- \66\ Id. --------------------------------------------------------------------------- B. Consistency With Rule 17Ad-22(e)(4)(i) of the Exchange Act 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 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.\67\ --------------------------------------------------------------------------- \67\ 17 CFR 240.17Ad-22(e)(4)(i). --------------------------------------------------------------------------- As described above, the Commission believes the proposed VaR calculation based on an evenly-weighted volatility estimation would enable NSCC to better manage its credit exposure to Members in market conditions that reflect a rapid decrease in market price volatility levels; the proposed Gap Risk Measure would enable NSCC to better manage its credit exposure to Member portfolios that are more susceptible to Gap Risk Events; and the proposed Portfolio Margin Floor would enable NSCC to better manage its credit exposure to Members in certain scenarios, such as when a Member's portfolio holds either large gross market values or large net directional market values and market prices exhibit low volatility. Furthermore, NSCC would assess a Member the largest of these three calculations as the Member's volatility component to its Required Deposit. Each of these proposed changes is designed to help NSCC more effectively identify, measure, monitor, and manage its credit exposures to its Members. In doing so, the proposed changes would enable NSCC to more accurately assess the volatility component of a Member's Required Deposit and, thus, help NSCC maintain sufficient financial resources to cover its credit exposure to each Member fully with a high degree of confidence. Therefore, the Commission finds that the changes proposed in the Advance Notice are consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.\68\ --------------------------------------------------------------------------- \68\ Id. --------------------------------------------------------------------------- C. Consistency With Rule 17Ad-22(e)(6)(i) and (v) of the Exchange Act The Commission believes that the changes proposed in the Advance [[Page 9039]] Notice are consistent with Rule 17Ad-22(e)(6)(i) under the Exchange Act, which requires 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.\69\ Furthermore, the Commission believes that the changes proposed in the Advance Notice are consistent with Rule 17Ad-22(e)(6)(v) under the Exchange Act, which requires that NSCC establish, implement, maintain and enforce written policies and procedures reasonably designed to use an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products.\70\ --------------------------------------------------------------------------- \69\ 17 CFR 240.17Ad-22(e)(6)(i). \70\ 17 CFR 240.17Ad-22(e)(6)(v). --------------------------------------------------------------------------- As described above, the Commission believes the proposed VaR calculation based on an evenly-weighted volatility estimation would enable NSCC to better manage its credit exposure to Members in certain market conditions with a rapid decrease in market price volatility levels; the proposed Gap Risk Measure would enable NSCC to better manage its credit exposure to Member portfolios that are more susceptible to Gap Risk Events; and the proposed Portfolio Margin Floor would enable NSCC to better manage its credit exposure to Members in certain scenarios, such as low market price volatility when a Member's portfolio holds either large gross market values or large net directional market values and market prices exhibit low volatility. Moreover, NSCC would assess a Member the largest of these three calculations as the Member's volatility component to its Required Deposit. These three proposed volatility component calculations are designed to help improve NSCC's risk-based margin system by enabling NSCC to produce margin levels that are more commensurate with the risks and particular attributes of the relevant products, portfolios, and markets that NSCC serves. Additionally, as described above, the three proposed volatility component calculations are designed to use methods that are more appropriately tailored for measuring credit exposure that account for specific risk factors and portfolio effects. Therefore, the Commission finds that the changes proposed in the Advance Notice are consistent with Rules 17Ad-22(e)(6)(i) and (v) under the Exchange Act.\71\ --------------------------------------------------------------------------- \71\ 17 CFR 240.17Ad-22(e)(6)(i) and (v). --------------------------------------------------------------------------- III. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Clearing Supervision Act,\72\ that the Commission does not object to advance notice SR-NSCC-2017-808 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 proposed rule change SR-NSCC- 2017-020 that reflects rule changes that are consistent with this Advance Notice, whichever is later. --------------------------------------------------------------------------- \72\ 12 U.S.C. 5465(e)(1)(I). By the Commission. Brent J. Fields, Secretary. [FR Doc. 2018-04237 Filed 3-1-18; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 83, No. 42 / Friday, March 2, 2018 / Notices 9035
proposed rule change between the 4(n)(1)(i) 2 under the Securities NSCC’s potential losses associated with
Commission and any person, other than Exchange Act of 1934, as amended the liquidation of a Member’s portfolio
those that may be withheld from the (‘‘Exchange Act’’). On January 10, 2018, should the Member default.10 The
public in accordance with the NSCC filed Amendment No. 1 to the aggregate of all Members’ Required
provisions of 5 U.S.C. 552, will be advance notice.3 The advance notice, as Deposits constitutes NSCC’s Clearing
available for website viewing and modified by Amendment No. 1 Fund, which NSCC can access should a
printing in the Commission’s Public (hereinafter, the ‘‘Advance Notice’’) was defaulting Member’s own Required
Reference Room, 100 F Street NE, published for comment in the Federal Deposit be insufficient to satisfy NSCC’s
Washington, DC 20549, on official Register on February 8, 2018.4 The losses caused by the liquidation of the
business days between the hours of 10 Commission did not receive any Member’s portfolio.11
a.m. and 3 p.m. Copies of such filing comments on the Advance Notice. This
A. Evenly-Weighted Volatility
also will be available for inspection and publication serves as notice that the
Estimation
copying at the principal office of CBOE. Commission does not object to the
All comments received will be posted changes set forth in the Advance Notice. Each Member’s Required Deposit
without change. Persons submitting consists of several components.12
I. Description of the Advance Notice
comments are cautioned that we do not Generally, the largest component of a
redact or edit personal identifying The Advance Notice consists of Member’s Required Deposit is the
information from comment submissions. changes to NSCC’s Rules & Procedures volatility component, which is designed
You should submit only information (‘‘Rules’’) 5 that would enhance NSCC’s to capture the market price risk
that you wish to make available method for calculating the daily margin associated with each Member’s portfolio
publicly. All submissions should refer requirement for each NSCC member at a 99th percentile level of
to File Number SR–CBOE–2018–017 (‘‘Member’’).6 Specifically, NSCC confidence.13 NSCC currently calculates
and should be submitted on or before proposes to (1) add three new ways to the volatility component using a
March 23, 2018. calculate the volatility component of its parametric Value-at-Risk (‘‘VaR’’)
For the Commission, by the Division of
Members’ margin requirements, and (2) model.14 NSCC’s current VaR
Trading and Markets, pursuant to delegated eliminate an outdated component of the calculation places more emphasis on
authority.18 margin calculation, as described more recent market observations (such as
Eduardo A. Aleman, fully below.7 NSCC states that the new recent price history) for the purpose of
Assistant Secretary.
volatility component calculations would estimating current market price
enable NSCC to mitigate the credit risks volatility levels, based on the
[FR Doc. 2018–04208 Filed 3–1–18; 8:45 am]
presented by Member portfolios in a assumption that the most recent price
BILLING CODE 8011–01–P
broader range of scenarios and market history is more relevant and accurate for
conditions than NSCC’s current measuring current market price
SECURITIES AND EXCHANGE volatility component calculation.8 volatility levels (referred to as an
COMMISSION A key tool that NSCC uses to manage ‘‘exponentially-weighted volatility
its credit exposures to Members is the estimation’’).15 However, volatility in
[Release No. 34–82780; File No. SR–NSCC– daily calculation and collection of the equity markets often rapidly reverts
2017–808] margin from each Member (‘‘Required to more commonly observed levels,
Deposit’’).9 NSCC collects Required followed by a subsequent spike.16 While
Self-Regulatory Organizations; Deposits from Members to mitigate
National Securities Clearing a VaR calculation that applies
Corporation; Notice of No Objection To exclusively an exponentially-weighted
www.treasury.gov/initiatives/fsoc/Documents/
Advance Notice Filing, as Modified by 2012%20Annual%20Report.pdf. Therefore, NSCC
volatility estimation can capture sudden
Amendment No. 1, To Enhance the is required to comply with the Payment, Clearing increases in volatility, it may result in
Calculation of the Volatility Component and Settlement Supervision Act and file advance a swift decline in margin that does not
notices with the Commission. See 12 U.S.C. adequately capture the risks related to a
of the Clearing Fund Formula That 5465(e).
Utilizes a Parametric Value-at-Risk 2 17 CFR 240.19b–4(n)(1)(i).
rapid decrease in market price volatility
Model and Eliminate the Market Maker 3 In Amendment No. 1 to the advance notice, levels.17 NSCC proposes to mitigate this
Domination Charge NSCC amended and replaced in its entirety the shortcoming by adding another method
originally filed confidential Exhibit 3a with a new for computing the VaR calculation that
February 26, 2018. confidential Exhibit 3a in order to remove does not diminish the value of older
references to a practice that was not intended for
National Securities Clearing consideration as part of the filing.
market observations.18 Specifically,
Corporation (‘‘NSCC’’) filed with the 4 Securities Exchange Act Release No. 82631 NSCC proposes to add a VaR calculation
U.S. Securities and Exchange (February 5, 2018), 83 FR 5658 (February 8, 2017) that gives equal weight to all historical
Commission (‘‘Commission’’) on (SR–NSCC–2017–808) (‘‘Notice’’). NSCC also filed a volatility observations during a
December 28, 2017 the advance notice related proposed rule change with the Commission specified look-back period (referred to
pursuant to Section 19(b)(1) of the Exchange Act
SR–NSCC–2017–808 pursuant to and Rule 19b–4 thereunder, seeking approval of by NSCC as an ‘‘evenly-weighted
Section 806(e)(1) of Title VIII of the changes to its rules necessary to implement the volatility estimation’’),19 which could
Dodd-Frank Wall Street Reform and Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR
Consumer Protection Act entitled the 240.19b–4, respectively. The proposed rule change 10 Id.
was published in the Federal Register on January
Payment, Clearing, and Settlement 19, 2018. Securities Exchange Act Release No.
11 Id.
Supervision Act of 2010 (‘‘Clearing 82494 (January 12, 2018), 83 FR 2828 (January 19,
12 See Procedure XV (Clearing Fund Formula and
daltland on DSKBBV9HB2PROD with NOTICES
Supervision Act’’) 1 and Rule 19b– 2018) (SR–NSCC–2017–020). The Commission did Other Matters) of the Rules, supra note 5.
13 Notice, 83 FR at 5659–60.
not receive any comments on that proposal.
5 NSCC’s Rules, available at http://dtcc.com/∼/ 14 Notice, 83 FR at 5660.
18 17CFR 200.30–3(a)(12).
1 12 media/Files/Downloads/legal/rules/nscc_rules.pdf. 15 Id.
U.S.C. 5465(e)(1). The Financial Stability 6 Notice, 83 FR at 5659. 16 Id.
Oversight Council designated NSCC a systemically
7 Id. 17 Id.
important financial market utility on July 18, 2012.
8 Id. 18 Id.
See Financial Stability Oversight Council 2012
Annual Report, Appendix A, http:// 9 Id. 19 Id.
VerDate Sep<11>2014 18:10 Mar 01, 2018 Jkt 244001 PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 E:\FR\FM\02MRN1.SGM 02MRN1](https://thefederalregister.org/doc/83_FR_9077/page/1.svg)
![Federal Register / Vol. 83, No. 42 / Friday, March 2, 2018 / Notices 9039
Notice are consistent with Rule 17Ad– consistent with Rules 17Ad–22(e)(6)(i) I. Self-Regulatory Organization’s
22(e)(6)(i) under the Exchange Act, and (v) under the Exchange Act.71 Statement of the Terms of Substance of
which requires that NSCC establish, the Proposed Rule Change
III. Conclusion
implement, maintain and enforce FINRA is proposing revisions to the
written policies and procedures It is therefore noticed, pursuant to content outline and selection
reasonably designed to cover its credit Section 806(e)(1)(I) of the Clearing specifications for the Securities Trader
exposures to its participants by Supervision Act,72 that the Commission (Series 57) examination as part of the
establishing a risk-based margin system does not object to advance notice SR– restructuring of the representative-level
that, at a minimum considers, and NSCC–2017–808 and that NSCC is examination program.5 In addition,
produces margin levels commensurate authorized to implement the proposed FINRA is proposing to make changes to
with, the risks and particular attributes change as of the date of this notice or the format of the content outline. FINRA
of each relevant product, portfolio, and the date of an order by the Commission is not proposing any textual changes to
market.69 Furthermore, the Commission approving proposed rule change SR– the By-Laws, Schedules to the By-Laws
believes that the changes proposed in NSCC–2017–020 that reflects rule or Rules of FINRA.
the Advance Notice are consistent with changes that are consistent with this The revised Series 57 content outline
Rule 17Ad–22(e)(6)(v) under the Advance Notice, whichever is later. is attached.6 The revised Series 57
Exchange Act, which requires that selection specifications have been
By the Commission.
NSCC establish, implement, maintain submitted to the Commission under
Brent J. Fields,
and enforce written policies and separate cover with a request for
procedures reasonably designed to use Secretary.
confidential treatment pursuant to SEA
an appropriate method for measuring [FR Doc. 2018–04237 Filed 3–1–18; 8:45 am] Rule 24b–2.7
credit exposure that accounts for BILLING CODE 8011–01–P The text of the proposed rule change
relevant product risk factors and is available on FINRA’s website at
portfolio effects across products.70 http://www.finra.org, at the principal
As described above, the Commission SECURITIES AND EXCHANGE office of FINRA and at the
believes the proposed VaR calculation COMMISSION Commission’s Public Reference
based on an evenly-weighted volatility Room.[sic]
estimation would enable NSCC to better [Release No. 34–82772; File No. SR–FINRA–
2018–010]
II. Self-Regulatory Organization’s
manage its credit exposure to Members Statement of the Purpose of, and
in certain market conditions with a Statutory Basis for, the Proposed Rule
Self-Regulatory Organizations;
rapid decrease in market price volatility Change
Financial Industry Regulatory
levels; the proposed Gap Risk Measure
Authority, Inc.; Notice of Filing and In its filing with the Commission,
would enable NSCC to better manage its
Immediate Effectiveness of a Proposed FINRA included statements concerning
credit exposure to Member portfolios
Rule Change To Revise the Securities the purpose of and basis for the
that are more susceptible to Gap Risk
Trader (Series 57) Examination proposed rule change and discussed any
Events; and the proposed Portfolio
Margin Floor would enable NSCC to comments it received on the proposed
February 26, 2018.
better manage its credit exposure to rule change. The text of these statements
Pursuant to Section 19(b)(1) of the may be examined at the places specified
Members in certain scenarios, such as
Securities Exchange Act of 1934 in Item IV below. FINRA has prepared
low market price volatility when a
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 summaries, set forth in sections A, B,
Member’s portfolio holds either large
notice is hereby given that on February and C below, of the most significant
gross market values or large net
12, 2018, Financial Industry Regulatory aspects of such statements.
directional market values and market
Authority, Inc. (‘‘FINRA’’) filed with the
prices exhibit low volatility. Moreover, A. Self-Regulatory Organization’s
Securities and Exchange Commission
NSCC would assess a Member the Statement of the Purpose of, and
(‘‘SEC’’ or ‘‘Commission’’) the proposed
largest of these three calculations as the Statutory Basis for, the Proposed Rule
rule change as described in Items I, II, Change
Member’s volatility component to its
and III below, which Items have been
Required Deposit. 1. Purpose
prepared by FINRA. FINRA has
These three proposed volatility designated the proposed rule change as
component calculations are designed to Section 15A(g)(3) of the Act 8
‘‘constituting a stated policy, practice, authorizes FINRA to prescribe standards
help improve NSCC’s risk-based margin or interpretation with respect to the
system by enabling NSCC to produce of training, experience, and competence
meaning, administration, or for persons associated with FINRA
margin levels that are more enforcement of an existing rule’’ under
commensurate with the risks and members. In accordance with that
Section 19(b)(3)(A)(i) of the Act 3 and provision, FINRA has developed
particular attributes of the relevant Rule 19b–4(f)(1) thereunder,4 which
products, portfolios, and markets that renders the proposal effective upon 5 FINRA also is proposing corresponding
NSCC serves. Additionally, as described receipt of this filing by the Commission. revisions to the Series 57 question bank. Based on
above, the three proposed volatility The Commission is publishing this instruction from SEC staff, FINRA is submitting this
component calculations are designed to notice to solicit comments on the
filing for immediate effectiveness pursuant to
use methods that are more appropriately Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(1)
proposed rule change from interested thereunder, and is not filing the question bank. See
tailored for measuring credit exposure persons. Letter to Alden S. Adkins, Senior Vice President
daltland on DSKBBV9HB2PROD with NOTICES
that account for specific risk factors and and General Counsel, NASD Regulation, from
portfolio effects. Therefore, the 71 17
Belinda Blaine, Associate Director, Division of
CFR 240.17Ad–22(e)(6)(i) and (v). Market Regulation, SEC, dated July 24, 2000. The
Commission finds that the changes 72 12 U.S.C. 5465(e)(1)(I). question bank is available for SEC review.
proposed in the Advance Notice are 1 15 U.S.C. 78s(b)(1). 6 The Commission notes that the content outline
2 17 CFR 240.19b–4. is attached to the filing, not to this Notice.
69 17 CFR 240.17Ad–22(e)(6)(i). 3 15 U.S.C. 78s(b)(3)(A)(i). 7 17 CFR 240.24b–2.
70 17 CFR 240.17Ad–22(e)(6)(v). 4 17 CFR 240.19b–4(f)(1). 8 15 U.S.C. 78o–3(g)(3).
VerDate Sep<11>2014 18:10 Mar 01, 2018 Jkt 244001 PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 E:\FR\FM\02MRN1.SGM 02MRN1](https://thefederalregister.org/doc/83_FR_9077/page/5.svg)
Document Created: 2018-03-01 23:57:03
Document Modified: 2018-03-01 23:57:03
| 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 | 83 FR 9035 |
2024 Federal Register | Disclaimer | Privacy Policy
USC | CFR | eCFR