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Federal Register / Vol. 86, No. 156 / Tuesday, August 17, 2021 / Notices that the Proposed Rule Change is consistent with Section 17Ab3F of the Act.
As discussed in Section II.A above, backtesting deficiencies highlight when a Members margin is insufficient to cover NSCCs credit exposure to that Member.45 If a defaulted Members margin is insufficient to satisfy losses caused by the closeout of that Members positions, NSCC and its non-defaulting Members may be subject to losses. As summarized in Section II.B above, the proposed increase would have provided NSCC with additional resources, which would have resulted in a decrease in backtesting deficiencies and thus a reduction in credit exposure to its Members under the proposal.46
Therefore, the Commission believes NSCC would improve the probability that the increased minimum margin amount it collects is sufficient to cover NSCCs credit exposure to those Members, particularly in instances where the defaulted Members clearing activity abruptly increases following a period of low or no activity. This increase, in turn, could reduce the possibility that NSCC or its nondefaulting Members face losses from the close-out process.
Moreover, NSCC would continue to require that Members pay an amount equal to the minimum Required Fund Deposit amount in cash. Therefore, the proposal would enable NSCC to have available additional collateral that is easier for NSCC to access quickly to complete end of day settlement upon a Members default, further reducing the risk of losses to NSCC or non-defaulting Members. Accordingly, the Commission believes the Proposed Rule Change would promote the safeguarding of securities and funds which are in the custody or control of NSCC or for which NSCC is responsible, consistent with Section 17Ab3F of the Act.47
45 See
supra text accompanying note 15.
supra text accompanying notes 2931.
47 In addition to its arguments about the Proposed Rule Change, one commenter also asserts that NSCCs other recent efforts to increase capital or methodology-based margin requirements represent unfair discrimination against Members who deal in stocks trading in the OTC Markets, inconsistent with Section 17Ab3F of the Act. See Alpine Letter, supra note 4, at 45. However, the Proposed Rule Change would not amend NSCCs capital or methodology-based margin requirements and is limited to the amendment of the minimum Required Fund Deposit amount. Therefore, the commenters arguments pursuant to Section 17Ab3F of the Act are outside the scope of this Proposed Rule Change. The commenter also argues that NSCC should instead eliminate risk by shortening the settlement cycle, rather than monetizing risk through increased margin requirements, such as under this Proposed Rule Change. See Alpine Letter, supra note 4, at 78.
However, the Proposed Rule Change is limited to
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B. Consistency With Section 17Ab3I
of the Act Section 17Ab3I of the Act requires that the rules of a clearing agency do not impose any burden on competition not necessary or appropriate in furtherance of the Act.48
This provision does not require the Commission to find that a proposed rule change represents the least anticompetitive means of achieving the goal.49 Rather, it requires the Commission to balance the competitive considerations against other relevant policy goals of the Act.50
The Commission acknowledges that the impact of increased margin requirements will likely present higher costs to some Members with lower operating margins, lower cash reserves or higher costs of capital compared to other Members, which may weaken those Members competitive positions relative to others. For example, certain smaller Members could be required to make and hold an additional deposit of up to $240,000 to the Clearing Fund, which would limit the smaller Members ability to utilize that cash for other operating or investing purposes.
Although some of NSCCs Members could experience a burden on competition because of these higher costs, the Commission concludes any burden to these Members is necessary and appropriate in furtherance of the policy goals under the Act 51 for the following reasons.
As discussed in Section II.A above, NSCC seeks to maintain sufficient resources i.e., margin to cover its credit exposures to its Members fully with a high degree of confidence. Conversely, NSCC uses backtesting to determine when a Members margin would have been insufficient to cover NSCCs credit exposure to that Member.52 As previously discussed, the Impact Study Results show the proposed $250,000
minimum Required Fund Deposit would have decreased the number of backtesting deficiencies, thereby increasing the number of Members for NSCCs minimum Required Fund Deposit amount in order to manage risk under the current settlement cycle. Therefore, the commenters arguments related to shortening the settlement cycle are likewise outside the scope of this Proposed Rule Change.
48 15 U.S.C. 78q1b3I.
49 See Bradford National Clearing Corp., 590 F.2d 1085, 1105 D.C. Cir. 1978 Bradford.
50
51 15 U.S.C. 78q1b3I. Specifically, as discussed in greater detail in Section III.C and III.D
below, the Proposed Rule Change is necessary and appropriate to further the policy goals under Rule 17Ad22e4i and e6iii. 17 CFR 240.17Ad 22e4i and e6iii.
52 See supra text accompanying notes 1215.

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which NSCC maintained sufficient coverage at a confidence level of at least 99%.53 Therefore, the Proposed Rule Change would enable NSCC to better manage its credit exposure to its Members by ensuring it holds sufficient collateral to cover that exposure, thereby reducing the likelihood that NSCC or non-defaulting Members would incur losses resulting from a Member default.
Additionally, based on the information set forth in Section II.B
above regarding the average ENC of the impacted Members,54 the Commission believes that the vast majority of impacted Members likely would not experience a weakened competitive position compared to others as a result of the Proposed Rule Change. The average ENC data shows that almost all of the impacted Members would likely be able to satisfy the additional cash deposits needed to comply with the Proposed Rule Change with minimal impact to the Members financials.55
Commenters have raised concerns regarding the Proposed Rule Change in light of its potential competitive impact on certain NSCC Members. Specifically, one commenter objects to the proposed increase to $250,000, stating that NSCCs current Rules are more than adequate to guard against risk at the small firm-level and that the increase would be purely a tax on the smallest, inactive and lowest risk firms.56
Another commenter similarly objects to the proposed change stating the increase would disproportionately affect NSCCs smallest Members.57 The Commission disagrees for the reasons discussed above, which indicate that the proposed increase would increase Members Required Fund Deposits proportional to the risks posed by those Members.
Moreover, as discussed in Section II.A
above, it is possible that, in certain circumstances, the current minimum Required Fund Deposit amount would 53 See supra text accompanying note 44. See also, supra text accompanying notes 2931.
54 See supra notes 3437 and accompanying text.
98% of the impacted Members had, on average, an ENC above $2.5 million. Therefore, on average, 2%
of the 46 impacted Members would maintain ENC
below $2.5 million, which equals approximately one Member who could be required to hold 9.6%
or more of its ENC on deposit at NSCC.
55 NSCC represents it would continue to require that Members pay an amount equal to the minimum Required Fund Deposit amount in cash. See Notice of Filing, supra note 3, at 26590.
56 See Wachtel Letter, supra note 5.
57 The commenter concludes the Proposed Rule Change will undoubtedly put some members out of business. See Alpine Letter, supra note 4, at 5.
Based on its consideration of the ENC data, as discussed above, the Commission does not agree with the commenters argument. See supra text accompanying notes 5152.

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