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lotter on DSK11XQN23PROD with NOTICES3

Federal Register / Vol. 86, No. 153 / Thursday, August 12, 2021 / Notices 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.
The proposal is also structured in a manner that allows NSCC to protect itself from associated liquidity risk.
Specifically, the proposed rule change 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.105 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
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.106
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.107 NSCC
would take into account such Price Differential payment obligations when 105 See
proposed Rule 56, Section 14bviii.

106 Id.
107 See
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.108 109 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 prenovation 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. 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.
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.
For these reasons NSCC believes the proposal would help promote robust risk management at NSCC, consistent with the objective and principles of Section 805b of the Clearing Supervision Act.

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Reducing Systemic Risks and Supporting the Stability of the Broader Financial System NSCC also believes that the proposal is consistent with reducing systemic risks and supporting the stability of the broader financial system. As described above, the proposal would lower the risk of liquidity drain in the U.S. equity securities financing market by lessening counterparties likely inclination to unwind transactions in a stressed market scenario. NSCC would use its risk management resources to provide confidence to market participants that they will receive back their cash or securities, as applicable, which should limit the propensity for market participants to seek to unwind their transactions in a stressed market scenario.
In addition, the proposal would protect against fire sale risk. As described above, in the event of a default, NSCC would conduct a centralized, orderly liquidation of the defaulters SFT Positions. Such an organized liquidation should result in substantially less price depreciation and market disruption than multiple independent non-defaulting parties racing against one another to liquidate the positions. In addition, NSCC would only need to liquidate the defaulters net positions. Limiting the positions that need to be liquidated to the defaulters net positions should reduce the volume of required sales activity, which in turn should limit the price and market impact of the close-out of the defaulters positions. NSCC would also use its risk management resources to provide confidence to market participants that they will receive back their cash or securities, as applicable, which should limit the propensity for market participants to seek to unwind their transactions in a stressed market scenario. By lowering the risk of liquidity drain in the U.S. equity securities financing market and protecting against fire sale risk, NSCC
believes the proposal would help reduce systemic risks, which in turn helps support the stability of the broader financial system, consistent with the objectives and principles of Section 805b of the Clearing Supervision Act.
NSCC also believes that the proposed rule change is consistent with Rules 17Ad22e7, 17Ad22e8, and 17Ad22e18, promulgated under the Act,110 for the reasons stated below.
Rule 17Ad22e7 under the Act requires NSCC to establish, implement, maintain, and enforce written policies
108 Id.

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