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Federal Register / Vol. 86, No. 153 / Thursday, August 12, 2021 / Notices
and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne by the covered clearing agency.111 NSCC believes that the proposed changes to establish the SFT
Clearing Service are consistent with Rule 17Ad22e7 because, as described above, the proposal is 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.112 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.113 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 111 17

CFR 240.17Ad22e7.
proposed Rule 56, Section 14bviii.

112 See 113 Id.

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SFTs.114 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.115 116 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. Therefore, NSCC
believes that the proposed changes to establish the SFT Clearing Service are consistent with Rule 17Ad22e7
under the Act.117
Rule 17Ad22e8 under the Act 118
requires NSCC to establish, implement, maintain and enforce written policies and procedures reasonably designed to define the point at which settlement is final to be no later than the end of the day on which the payment or obligation is due. NSCC believes that the proposed changes to establish the SFT Clearing Service are consistent with Rule 17Ad 22e8 because, as described above, the proposal would make it clear to SFT
Members the point at which settlement is final with respect to SFTs cleared through NSCC. Specifically, Section 7 in the proposed Rule 56 Securities Financing Transaction Clearing Service provides that an SFT, or a portion thereof, shall be deemed complete and final upon Final Settlement of the SFT, or such portion.119 Having clear 114 See
proposed Rule 56, Section 14bix.

115 Id.
116 17

CFR 240.17Ad22e7.

117 Id.
118 17

CFR 240.17Ad22e8.
proposed changes to establish the SFT
Clearing Service would provide that NSCC may delay the close-out of a Defaulting SFT Members SFT Positions if such a close-out would create a disorderly market. In such a situation, the proposed changes would allow NSCC to correspondingly delay Final Settlement of any Default-Related SFTs on the same SFT Securities. NSCC does not believe this provision would affect settlement finality because if NSCC delays Final Settlement following an SFT Member Default, the Non-Defaulting Members related payment or delivery obligation is correspondingly delayed. As a result, the provision would not allow a settlement to be final after the due date of the relevant payment obligations.
Rather, consistent with the approach of many 119 The
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provisions in this regard would enable SFT Members to better identify the point at which settlement is final with respect to their SFTs. As such, NSCC
believes the proposed changes to establish the SFT Clearing Service are consistent with Rule 17Ad22e8
under the Act.120
Rule 17Ad22e18 under the Act requires, in part, that NSCC establish, implement, maintain and enforce written policies and procedures reasonably designed to establish objective, risk-based, and publicly disclosed criteria for participation.121
NSCC believes the proposed changes to establish new membership categories and requirements for Sponsoring Members and Sponsored Members would establish objective, risk-based, and publicly disclosed criteria for participation in NSCC as Sponsoring Members and Sponsored Members.
Specifically, as proposed, in order for an applicant to become a Sponsoring Member, the applicant would be required to satisfy a number of objective and risk-based eligibility criteria. First, the applicant must be a Member. In addition, if the applicant is a RegisteredBroker-Dealer, then it would be required to have i Net Worth of at least $25
million and ii excess net capital over the minimum net capital requirement imposed by the SEC or such higher minimum capital requirement imposed by the applicants designated examining authority of at least $10 million.
Likewise, in order for an applicant to become a Sponsored Member, the applicant would be required to meet certain objective, risk-based eligibility criteria. Specifically, an applicant would be eligible to apply to become a Sponsored Member if it is either a qualified institutional buyer as defined by Rule 144A 122 under the Securities Act,123 or a legal entity that, although not organized as an entity specifically listed in paragraph a1iH of Rule 144A under the Securities Act, satisfies the financial requirements necessary to be a qualified institutional buyer as specified in that paragraph. If approved, the requirements for proposed new clearing agency and derivatives clearing organization rules, it simply allows NSCC to postpone those due dates in order to minimize market destabilization. See, e.g., The Options Clearing Corporation OCC Rule 903 Obligation to Deliver https www.theocc.com/getmedia/
9d3854cd-b782-450f-bcf7-33169b0576ce/occ_
rules.pdf and ICE Clear Credit LLC Rule 20605e https www.theice.com/publicdocs/clear_credit/
ICE_Clear_Credit_Rules.pdf.
120 17 CFR 240.17Ad22e8.
121 17 CFR 240.17Ad22e18.
122 17 CFR 230.144A.
123 15 U.S.C. 77a et seq.

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