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Federal Register / Vol. 86, No. 55 / Wednesday, March 24, 2021 / Notices
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Proposed Daily Calculation of Supplemental Liquidity Deposits Supplemental Liquidity Providers.
Under the proposed Rule 4A, each Business Day NSCC would determine the 30 or fewer Members each such Member a Supplemental Liquidity Provider that had the Peak Liquidity Need, which would be defined as the largest Daily Liquidity Need that NSCC
would have for that Member or Affiliated Family in a Lookback Period. 26 For purposes of this calculation, Daily Liquidity Need would be defined as the amount of liquid resources needed to effect the settlement of NSCCs payment obligations as a central counterparty over a three day settlement cycle, assuming the default of that Member on that day.
As described above, Supplemental Liquidity Providers are currently identified by reviewing Members Special Activity Peak Liquidity Exposures over the Lookback Period.
Under the proposed approach, NSCC
would base this determination on Members Peak Liquidity Need, which would continue to identify those Members whose activity posed the largest liquidity risks to NSCC during the Lookback Period. The proposed approach would no longer require a calculation using NSCCs available liquid resources on each day in the Lookback Period but would use a simpler approach by looking only at liquidity need. The proposed approach to use a simpler calculation would reduce the risk of error and would clarify the description of how NSCC
would identify Supplemental Liquidity Providers in the proposed Rule 4A, making it more predictable to Members.
Supplemental Liquidity Obligation.
After NSCC determines the Supplemental Liquidity Providers, NSCC would then determine if any of the Supplemental Liquidity Providers would be required to pay an SLD on that Business Day. The proposed Rule 4A
would use a simplified calculation by determining if the Daily Liquidity Need for each Supplemental Liquidity Provider on that Business Day exceeds the sum of NSCCs qualifying liquid resources available to NSCC on that day, assuming stressed market conditions described below defined in the proposed Rule 4A as Qualifying 26 The Lookback Period would continue to be defined as 24 months, or a longer period as determined by NSCC in its discretion. NSCC may adjust the Lookback Period if, for example, unusual activity observed in the Lookback Period is not an appropriate indicator of future settlement activity and causes a Member to be a Supplemental Liquidity Provider. See Section 2 Defined Terms of Rule 4A, id.

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Liquid Resources. The result of that calculation would be a Supplemental Liquidity Providers SLD requirement defined in the proposed Rule 4A as a Supplemental Liquidity Obligation for that day. If the Daily Liquidity Need of a Supplemental Liquidity Provider does not exceed NSCCs Qualifying Liquid Resources on that day, then it would not have a Supplemental Liquidity Obligation.
Because this calculation would be done at the start of each Business Day as discussed further below, it would be based on the Qualifying Liquid Resources, including Required Fund Deposits to the Clearing Fund, available to NSCC as of the end of the prior Business Day. Additionally, in order to anticipate market conditions that could cause Qualifying Liquid Resources to be unavailable on that day, NSCC would apply stress scenarios in determining its total Qualifying Liquid Resources for purposes of Rule 4A. Currently, NSCC
applies stress scenarios in determining the Special Activity Daily Liquidity Need and, in practice, they are currently applied to the Other Qualifying Liquid Resources in this calculation under the current Rule 4A.27 The proposed change would allow NSCC to continue to assume stressed markets in its SLD
calculations, which protects it against unexpected market events.28 The proposed changes to Rule 4A would make it clearer how these stress scenarios are applied.
Under this proposed calculation, NSCC would no longer need to estimate the potential liquidity need a Members activity could pose to NSCC based on activity that settled in the Lookback Period. Instead, the Supplemental Liquidity Obligation of a Member would be calculated based on the actual liquidity exposure that its daily activity would pose to NSCC on that particular day in the event of that Members default. The proposed change provides both NSCC and Members with a more reliable measure of the liquidity risks posed to NSCC by its Members daily settlement activity in calculating SLD
requirements.
27 Current Rule 4A uses the defined term Other Qualifying Liquid Resources to refer to NSCCs qualifying liquid resources other than the Clearing Fund and the Line of Credit. See Section 2 of Rule 4A Supplemental Liquidity Deposits of the Rules, id.
28 NSCC would apply the same stress scenarios that it currently applies, which include the market shocks of 1987, and removing the largest commitment to the Line of Credit, excess deposits to the Clearing Fund on deposit and proceeds from issued commercial paper that is maturing within five Business Days from NSCCs Qualifying Liquid Resource. Any changes to these stress scenarios would be announced by an Important Notice posted to NSCCs website.

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Each Supplemental Liquidity Provider that has a Supplemental Liquidity Obligation on a Business Day would receive a notice from NSCC of the amount of its Supplemental Liquidity Obligation and would be required to make a deposit in that amount to the Clearing Fund within one hour of such notice. The proposed timing of funding a Supplemental Liquidity Obligation would mirror the current requirement that is applied to Members Required Fund Deposits, which is also calculated and collected daily, and must be funded within one hour of demand.29 Specifically, NSCC
expects to deliver notification of Supplemental Liquidity Obligations to Supplemental Liquidity Providers by around 8:30 a.m. ET each Business Day, with deposits required by no later than 9:30 a.m. ET.
Proposed Pro Rata Calculation of Supplemental Liquidity Obligations. As an alternative to the calculation of Supplemental Liquidity Obligations described above, proposed Rule 4A
would also state that, in the event two or more Supplemental Liquidity Providers have a Supplemental Liquidity Obligation of more than $2
billion on a Business Day, calculated pursuant to the calculation described above, NSCC may determine the Supplemental Liquidity Obligation of all Supplemental Liquidity Providers on that day would be their pro rata share of the largest Supplemental Liquidity Obligation calculated on that Business Day.30
This proposed alternative calculation of the Supplemental Liquidity Obligations would provide NSCC with the option of collecting only the largest SLD calculated on a Business Day, allocated among each of the Supplemental Liquidity Providers. The purpose of this proposed provision is to provide NSCC with the option of collecting enough funds to meet its regulatory requirements in circumstances when the aggregate 29 See Section IIB of Procedure XV Clearing Fund Formula and Other Matters of the Rules, supra note 4.
30 As an example, the Supplemental Liquidity Obligations for three Supplemental Liquidity Providers on a Business Day areMember A: $6
billion, Member B: $2 billion and Member C: $1
billion. If NSCC determines, in its sole discretion, to calculate their Supplemental Liquidity Obligations on a pro-rata basis, then their Supplemental Liquidity Obligations would be Member A: $4 billion or 69 of the largest Supplemental Liquidity Obligation of $6 billion, Member B: $1.3 billion or 29 of the $6 billion and Member C: $700 million or 19 of the $6 billion.
The notice provided to each Supplemental Liquidity Provider on that Business Day would inform those Members that this pro-rata calculation was applied.

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