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Federal Register / Vol. 86, No. 153 / Thursday, August 12, 2021 / Notices
lotter on DSK11XQN23PROD with NOTICES3

Member and/or as a Member. These requirements include, but are not limited to, the requirements specified in proposed Rule 2C for Members participating in the service as a Sponsoring Member; the requirements specified in proposed Rule 2D for Members participating in the service as an Agent Clearing Member; and for all Members participating in the service, the requirements specified in proposed Rule 56. Specific details on these requirements and the manner in which the proposed SFT Clearing Service would affect Members that choose to participate in the proposed SFT
Clearing Service are described above in Items IIBviAProposed Rule ChangesProposed Rule 2C
Sponsoring Members and Sponsored Members, viBProposed Rule ChangesProposed Rule 2DAgent Clearing Members, and viC
Proposed Rule ChangesProposed Rule 56Securities Financing Transaction Clearing Service.
The proposed SFT Clearing Service would not materially affect existing Members that do not choose to participate in it. First, the proposed SFT
Clearing Service would not materially affect the operation of CNS or any other services offered by NSCC. In addition, SFT Members would be subject to the same or higher credit standards and market risk management requirements as those applicable to Members that choose not to participate in the proposed SFT Clearing Service, as described above. Moreover, although Members who choose not to participate in the proposed SFT Clearing Service would be subject to potential loss allocation in the event of an SFT
Member default just as SFT Members would be subject to potential loss allocation in the event of the default of a Member that chooses not to participate in the proposed SFT Clearing Service, the underlying securities that would be subject of any such default-related liquidation of an SFT Member are a subset of the same CNS-eligible securities with respect to which NSCC
today guarantees settlement in the cash equity market, thus not materially affecting the nature of the loss allocation risk applicable to Members.
Expected Effect on, and Management of, Risks to the Clearing Agency, Its Participants and the Market NSCC expects certain market, liquidity, credit and operational risks may be presented by the establishment of the proposed SFT Clearing Service and the additional membership categories proposed in connection therewith. Accordingly, NSCC proposes
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to address and manage each of these risks as detailed below.
Market Risk The proposal is structured in a manner that allows NSCC to protect itself from associated market risk. SFT
activity would be risk managed by NSCC in a manner consistent with Members CNS positions. Moreover, all SFT Positions would be margined independently of the Members other positions, i.e., Required SFT Deposit.
The Required SFT Deposit would generally be calculated using the same procedure applicable to CNS positions, but with a separate $250,000
minimum.92
As described above, consistent with the manner in which clearing fund requirements are satisfied by members of FICC for their cleared securities financing transactions, NSCC would require that i a minimum of 40% of an SFT Members Required SFT Deposit consist of a combination of cash and Eligible Clearing Fund Treasury Securities and ii the lesser of $5,000,000 or 10% of an SFT Members Required SFT Deposit but not less than $250,000 93 consist of cash.94 NSCC
would also have the discretion to require a Member to post its Required SFT Deposit in proportion of cash higher than would otherwise be required. NSCCs determination to impose any such requirement would be made in view of market conditions and other financial and operational capabilities of the relevant SFT Member.
Furthermore, NSCC would require additional Clearing Fund deposits to address two situations that may present unique risk. First, if the share price of underlying securities of an SFT that has already been novated to NSCC falls below the threshold established by NSCC from time to time, NSCC would require both pre-novation counterparties to the SFT to post Clearing Fund equal to 100% of the market value of such underlying securities until such time as the per share price of the underlying securities equals or exceeds such threshold. Second, in the event an SFT
is subject to a collateral haircut i.e., the SFT Cash exceeds the market value of the securities, NSCC would require the Transferor or in the case of an Agent Clearing Member Transaction, the Agent Clearing Member to post Clearing Fund equal to such excess.
Additionally, the Sponsoring Member Required Fund Deposits and Agent Clearing Member Required Fund 92 Supra
note 32.
note 34.
94 Supra note 35.

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Deposits would each be calculated on a gross basis, and no offsets for netting of positions as between different Sponsored Members or different Customers, as applicable, would be permitted. Moreover, any Member that opts to apply to become a Sponsoring Member or an Agent Clearing Member would be subject to an activity limit as described above.
NSCC is also proposing to limit the SFTs eligible for clearing to overnight transactions on securities that are CNSeligible equity securities with a share price that equals or exceeds the threshold established by NSCC from time to time and that are fully collateralized by cash. NSCC believes these limitations, in addition to the Clearing Fund requirements, would limit the potential market risk associated with SFTs.
Liquidity Risk The proposal is also structured in a manner that allows NSCC to protect itself from associated liquidity risk.
Specifically, the proposal would mitigate NSCCs liquidity risk associated with an SFT Member default by providing that the Final Settlement obligations owing to non-defaulting SFT
Members under SFTs to which the Defaulting SFT Member was a party will be settled in accordance with the normal settlement cycle for the purchase or sale of securities, as applicable.95 NSCC would accordingly be able to satisfy such Final Settlement obligations through market action if necessary rather than through its own liquidity resources. More specifically, NSCC would be able to sell the securities lent by a Defaulting SFT
Member and/or purchase the securities borrowed by a Defaulting SFT Member and use the proceeds of such sales and/
or the securities purchased to satisfy the Defaulting SFT Members Final Settlement obligations to non-defaulting SFT Members. In the absence of this provision, NSCC would need to rely exclusively on its liquidity resources to satisfy Final Settlement obligations owing to non-defaulting SFT Members, since it would not receive the proceeds of any market action to liquidate the Defaulting SFT Members SFT Positions until after Final Settlement obligations were due.
The proposal would also provide that NSCC could further delay its satisfaction of Final Settlement obligations to non-defaulting SFT
Members beyond the normal settlement cycle for the purchase or sale of securities to the extent NSCC

93 Supra
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95 See
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proposed Rule 56, Section 14bviii.

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