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Federal Register / Vol. 86, No. 153 / Thursday, August 12, 2021 / Notices
determines that taking market action to close-out some or all of the Defaulting SFT Members novated SFT Positions would create a disorderly market in the relevant SFT Securities.96
However, in any case, until NSCC has satisfied the Final Settlement obligations owing to non-defaulting SFT
Members, NSCC would continue paying to and receiving from non-defaulting SFT Members the applicable Price Differential i.e., the change in market value of the relevant securities with respect to their novated SFTs.97 NSCC
would take into account such Price Differential payment obligations when calculating the amount of liquidity resources that NSCC may require in the event of the default of the participant family that would generate the largest aggregate payment obligation for NSCC
in extreme but plausible market conditions.98 99 By continuing to process these Price Differential payments until Final Settlement occurs, NSCC would ensure that non-defaulting SFT
Members are kept in the same position as if the Defaulting SFT Member had not defaulted and the pre-novation counterparties had instead agreed to roll the SFTs. To the extent NSCC is required to pay a Price Differential to a non-defaulting SFT Member, NSCC
would rely on the NSCC Clearing Fund, including the Required SFT Deposit, in order to cover the liquidity need associated with any such Price Differential obligation.

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Credit Risk The proposal is also structured in a manner that allows NSCC to protect itself from associated credit risk. In addition to the Clearing Fund requirements discussed above, any Member that elects to participate in the proposed SFT Clearing Service would be subject to the same initial membership requirements and ongoing membership requirements and monitoring as any other Member.
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 in addition to an approval process that is separate from its original Member applications, as well as ongoing credit surveillance in its capacity as a Sponsoring Member or Agent Clearing Member, as applicable.
96 Id.
97 See
The proposal is also structured in a manner that allows NSCC to protect itself from associated operational risk.
NSCC proposes to utilize to a significant extent the same processes and infrastructure as it has used for many years to clear and settle cash market transactions for purposes of clearing and settling SFTs. NSCC staff is well versed in such processes and infrastructure and has been actively involved in the development of the proposed SFT
Clearing Service, thereby allowing for ready integration of support for the proposed SFT Clearing Service into NSCC staffs current workflows.
Accordingly, NSCC believes that, taken as a whole, the proposal would not have any risks to NSCC, its Members and the market overall that cannot be prudently managed or mitigated.
Consistency With the Clearing Supervision Act The proposed rule change would be consistent with Section 805b of Title VIII of the Clearing Supervision Act.100
The objectives and principles of Section 805b of the Clearing Supervision Act are to promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system.101
NSCC believes that the proposal would promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system, consistent with the objectives and principles of Section 805b of the Clearing Supervision Act.
Promoting Robust Risk Management and Promoting Safety and Soundness NSCC believes that the proposal is consistent with promoting robust risk management and promoting safety and soundness, particularly management of market risks, liquidity risks, credit risks and operational risks presented to NSCC.
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,
proposed Rule 56, Section 14bix.

98 Id.
99 17

Operational Risk
102 Supra 100 12

CFR 240.17Ad22e7.

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note 32.
note 34.
104 Supra note 35.

U.S.C. 5464b.

103 Supra
101 Id.

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but with a separate $250,000
minimum.102
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 $250,000 103 consist of cash.104 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 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
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