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Federal Register / Vol. 86, No. 153 / Thursday, August 12, 2021 / Notices
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Proposed Rule 56, Section 12 Clearing Fund Requirements Section 12 of proposed Rule 56 would set out the Clearing Fund requirements for SFT Members with respect to their SFT activity.
Section 12a of proposed Rule 56
would provide each SFT Member, other than an SFT Member that is a Sponsored Member, shall make and maintain on an ongoing basis a deposit to the Clearing Fund with respect to its SFT Positions the SFT Deposit.
Section 12a would provide that, for the avoidance of doubt, the SFT Positions for an SFT Member that is a Sponsoring Member shall include all SFT Positions held in its Sponsored Member SubAccounts in addition to its proprietary accounts.
Section 12b of proposed Rule 56
would provide that the SFT Deposit shall be held by NSCC or its designated agents as part of the Clearing Fund, to be applied as provided in Sections 1
through 12 of Rule 4 Clearing Fund.
Section 12c of proposed Rule 56
would provide that NSCC shall calculate the amount of each such SFT
Members required deposit for SFT
Positions, subject to a $250,000 79
minimum excluding the minimum contribution to the Clearing Fund as required by Procedure XV Clearing Fund Formula and Other Matters, Section II.A, by applying the Clearing Fund formula for CNS Transactions in Sections I.A1a, b, d, f g, h of Procedure XV as well as the additional Clearing Fund formula in Section I.B5 Intraday Mark-to-Market Charge of Procedure XV in the same manner as such sections apply to CNS
Transactions submitted to NSCC for regular way settlement, plus, with respect to any Non-Returned SFT, an additional charge that is calculated by x multiplying the Current Market Price of the SFT Securities that are the subject of such Non-Returned SFTs by the number of such SFT Securities that are the subject of the SFT and y multiplying such product by i 5% for SFT Members rated 1 through 4 on the Credit Risk Rating Matrix, ii 10% for SFT Members rated 5 or 6 on the Credit Risk Rating Matrix, or iii 20% for SFT
Members rated 7 on the Credit Risk Rating Matrix shall be applied to each SFT Member that is a party thereto 80
79 Supra
note 32.
Required SFT Deposit multipliers proposed for Non-Returned SFTs are identical to the Required Fund Deposit multipliers applied to CNS Fails Positions. See Procedure XV Clearing Fund Formula and Other Matters, Section I.A1e, supra note 4. While the concept of a fail does not exist in the securities lending market in the same manner as it does in the cash 80 The
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collectively and includes any and all Independent Amount SFT Cash Deposit Requirements, the Required SFT
Deposit; provided, however, notwithstanding anything to the contrary, A a minimum of 40% of an SFT Members Required SFT Deposit shall be made in the form of cash and/
or Eligible Clearing Fund Treasury Securities and y the lesser of $5,000,000 or 10% of an SFT Members Required SFT Deposit, with a minimum of $250,000,81 must be made and maintained in cash; provided, further, the additional Clearing Fund formula in Sections I.B1 Additional Deposits for Members on the Watch List; 2
Excess Capital Premium; 3
Backtesting Charge; 4 Bank Holiday Charge; Minimum Clearing Fund and Additional Deposit Requirements in Sections II.A1ab, II.B, and II.C;
as well as Section III Collateral Value of Eligible Clearing Fund Securities of Procedure XV shall apply to SFT
Members in the same manner as such sections apply to Members. As noted in the proposed rule text, for the purpose of applying Section I.A1h of Procedure XV Margin Liquidity Adjustment MLA charge, SFT
Positions shall be netted with Net Unsettled Positions, as defined in Procedure XV.82
Section 12d of proposed Rule 56
would provide that NSCC shall have the discretion to require an SFT Member to post its Required SFT Deposit in proportion of cash higher than as required under subsection c of proposed Section 12, as determined by NSCC from time to time in view of market, to the extent that the Final Settlement of an SFT is scheduled on a particular date but does not occur, whether directly or through a pair off as described in Section 8 of proposed Rule 56 as discussed above, that could potentially be a result of a squeeze or other market dislocation whereby NSCC may face increased market risk in the event of the default of either the Transferor or the Transferee. As a result, NSCC believes it is prudent to apply the same Required Fund Deposit multiplier to a Non-Returned SFT as it does to CNS Fails Positions.
The Credit Risk Rating Matrix is a financial model utilized by NSCC in its ongoing monitoring of Members based on various risk criteria. Each Member is rated by the Credit Risk Rating Matrix on a 7-point rating system, with 1 being the strongest credit rating and 7 being the weakest credit rating. As described above, to the extent that the Final Settlement of an SFT is scheduled on a particular date but does not occur, NSCC, as a central counterparty, is exposed to market risks.
Such exposures generally increase when the SFT
Members risk of default increases, as reflected by the SFT Members Credit Risk Rating Matrix credit rating. As such, the Required SFT Deposit multipliers proposed for Non-Returned SFTs vary based on the SFT Members credit rating to reflect the potential increase in market risk from SFT
Members with higher risk of default.
81 Supra note 34.
82 Supra note 33.

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market conditions and other financial and operational capabilities of the SFT
Member. Section 12d would further provide that NSCC shall make any such determination based on such factors as NSCC determines to be appropriate from time to time.
Section 12e of proposed Rule 56
would provide that if an SFT has Incremental Additional Independent Amount SFT Cash, the Transferor shall make an additional deposit to the Clearing Fund that equals the amount of the Incremental Additional Independent Amount SFT Cash for such SFT
Independent Amount SFT Cash Deposit, and such requirement the Independent Amount SFT Cash Deposit Requirement. Section 12e would also provide that the Independent Amount SFT Cash Deposit Requirement must be satisfied in cash and may, at the discretion of NSCC, be satisfied using Independent Amount SFT Cash Deposits that have previously been made by the Transferor in respect of SFTs with the same Transferee that have since settled.83 Section 12e would further provide that the Transferor shall satisfy any Independent Amount SFT Cash Deposit Requirement in respect of an SFT on the date that the SFT is novated to NSCC pursuant to the timeframes and deadlines established by NSCC for such purpose. In addition, Section 12e would provide that if, on a given day, the Transferor satisfies its Independent Amount SFT Cash Deposit Requirement for some, but not all, SFTs novated to NSCC on that day, NSCC will consider the Transferor to have satisfied its Independent Amount SFT Cash Deposit Requirement for none of the SFTs that were novated to NSCC on that day.
Section 12f of proposed Rule 56
would provide that references to Clearing Fund in the other Rules shall include and apply to SFT Deposit, and references to Required Fund Deposit shall include and apply to Required SFT
Deposit, unless specifically noted otherwise in proposed Rule 56 or in such other Rules.
83 This could occur in a situation in which an existing SFT settles and then the Transferor enters into a new SFT with the same Transferee e.g., in a pair off as described in Section 8 of proposed Rule 56, discussed above. In that situation, if the Transferee or Sponsoring Member or Agent Clearing Member has not yet called back the Independent Amount SFT Cash Deposit it posted in respect of the Settling SFT, then NSCC may apply the deposit to the Independent Amount SFT Cash Deposit obligation associated with the new SFT.

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