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Federal Register / Vol. 86, No. 156 / Tuesday, August 17, 2021 / Notices SECURITIES AND EXCHANGE
COMMISSION
Release No. 3492640; File No. SRNSCC
2021005

Self-Regulatory Organizations;
National Securities Clearing Corporation; Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Partial Amendment No. 1, To Increase the National Securities Clearing Corporations Minimum Required Fund Deposit August 11, 2021.

I. Introduction On April 26, 2021, National Securities Clearing Corporation NSCC filed with the Securities and Exchange Commission Commission proposed rule change SRNSCC2021005 the Proposed Rule Change pursuant to Section 19b1 of the Securities Exchange Act of 1934 Act 1 and Rule 19b4 thereunder 2 to increase its minimum required fund deposit. The Proposed Rule Change was published for comment in the Federal Register on May 14, 2021,3 and the Commission has received comments 4 on the changes proposed therein.5 On June 24, 2021, pursuant to Section 19b2 of the Act,6
the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the proposed rule change.7
On August 5, 2021, NSCC filed a partial amendment Partial Amendment No.
1 to modify the Proposed Rule 1 15

U.S.C. 78sb1.
CFR 240.19b4.
3 Securities Exchange Act Release No. 91809 May 10, 2021, 86 FR 26588 May 14, 2021 File No. SR
NSCC2021005 Notice of Filing.
4 See Letter from Parsons, Behle & Latimer, Counsel for Alpine Securities Corporation, dated June 4, 2021, to Vanessa Countryman, Secretary, Commission Alpine Letter, available at https
www.sec.gov/comments/sr-nscc-2021-005/
srnscc2021005.htm.
5 NSCC appended an Exhibit 2 to the materials filed on April 26, 2021. The appended Exhibit 2
consists of a comment letter that NSCC received from one of its members objecting to NSCCs proposal in response to member outreach NSCC
conducted in 2019 Wachtel Letter. See Notice of Filing, supra note 3, at 26593. NSCC considered that comment in its Proposed Rule Change, and the Commission has considered the comment letter in making its determination, as discussed in Section III below. A copy of the comment letter is available at https www.dtcc.com/-/media/Files/Downloads/
legal/rule-filings/2021/NSCC/SR-NSCC-2021005.pdf.
6 15 U.S.C. 78sb2.
7 Securities Exchange Act Release No. 92250
June 24, 2021, 86 FR 34798 June 30, 2021 File No. SRNSCC2021005.

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Change.8 The Commission is publishing this notice to solicit comments on Partial Amendment No. 1 from interested persons and is approving the Proposed Rule Change, as modified by Partial Amendment No. 1, on an accelerated basis.9
II. Description of the Proposed Rule Change Currently, NSCC requires each Member to maintain a minimum Required Fund Deposit 10 amount of $10,000.11 NSCC proposes to increase each Members minimum Required Fund Deposit amount to $250,000.
A. Background NSCC provides central counterparty CCP services, including clearing, settlement, risk management, and a guarantee of completion for virtually all broker-to-broker trades involving equity securities, corporate and municipal debt securities, and certain other securities.
In its role as a CCP, a key tool NSCC
uses to manage its credit exposure to its Members is determining and collecting an appropriate Required Fund Deposit i.e., margin from each Member.12 A
Members Required Fund Deposit serves as collateral to mitigate potential losses to NSCC associated with the liquidation of the Members portfolio should that Member default. The aggregate of all Members Required Fund Deposits constitutes NSCCs Clearing Fund, which it would access, among other instances, should a defaulting Members own Required Fund Deposit be insufficient to satisfy losses to NSCC
caused by the liquidation of that Members portfolio.13
NSCC conducts daily backtesting to evaluate whether each Members Required Fund Deposit is sufficient to cover NSCCs credit exposures to that Member based on a simulated 8 In Partial Amendment No. 1, NSCC updates the proposed rule text filed as Exhibit 5 to the proposed rule change to include a legend to indicate a delayed implementation date, specifically that the rule change would be implemented not later than 20 business days after Commission approval of the Proposed Rule Change. NSCC did not change the purpose or substance of, or basis for, the Proposed Rule Change.
9 References to the Proposed Rule Change from this point forward refer to the Proposed Rule Change as modified by Partial Amendment No. 1.
10 Capitalized terms not defined herein are defined in NSCCs Rules and Procedures Rules, available at http dtcc.com//media/Files/
Downloads/legal/rules/nscc_rules.pdf.
11 See Section 1 of Rule 4, id.
12 See Rule 4 Clearing Fund and Procedure XV
Clearing Fund Formula and Other Matters of the Rules Procedure XV, supra note 8. The minimum Required Fund Deposit amount is required to be in cash. See Section II.A of Procedure XV, supra note 8.
13 See id.

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liquidation of the Members portfolio on that day.14 Backtesting is an ex-post comparison of actual outcomes with expected outcomes derived from the use of margin models.15 A backtesting deficiency occurs when NSCC
determines that the projected liquidation losses to NSCC arising in the event of a Members default would be greater than the Members Required Fund Deposit.16 Therefore, backtesting deficiencies highlight exposure that could subject NSCC to potential losses under normal market conditions in the event that a Member defaults.17
NSCC regularly reviews backtesting results to assess the effectiveness of its margining requirements.18 As part of its review, NSCC investigates the causes of any backtesting deficiencies, paying particular attention to repeat backtesting deficiencies that would result in the Members backtesting coverage to fall below the 99% confidence target to determine if there is an identifiable cause of repeat backtesting deficiencies.19 NSCC also evaluates whether multiple Members may experience backtesting deficiencies for the same underlying reason.20
Based on its regular reviews, NSCC
states it has found that Members with Required Fund Deposits below $250,000
disproportionately experience repeat backtesting deficiencies because, should the Members settlement activity abruptly increase, the additional exposure to NSCC would not be mitigated until the collection of the Required Fund Deposit either intraday or on the next business day.21 NSCC
states it has also found that its current minimum margin requirement of $10,000 is disproportionately lower 14 See Securities Exchange Act Release No. 81485
August 25, 2017, 82 FR 41433 August 31, 2017
NSCC2017008 adopting Model Risk Management Framework and stating that Required Fund Deposit backtesting would be performed at least on a daily basis; Securities Exchange Act Release No. 84458 October 19, 2018, 83 FR 53925
October 25, 2018 File No. SRNSCC2018009
amending the Model Risk Management Framework to provide enhanced governance.
15 See 17 CFR 240.17Ad22a1.
16 See Notice of Filing, supra note 3, at 26589.
17 See id.
18 See Notice of Filing, supra note 3, at 26589.
19 NSCC states a Members backtesting coverage would fall below the 99% confidence target if the Member has more than two backtesting deficiency days in a rolling twelve-month period. See Notice of Filing, supra note 3, at 26589. In other words, if a Member has three or more backtesting deficiency days during a twelve-month period, then the Members margin would not be sufficient 99%
of the time. NSCC believes that its targeted 99%
confidence level is consistent with its regulatory requirements under Rule 17Ad22e4i and e6iii. 17 CFR 240.17Ad22 e4i, and e6iii.
20 See Notice of Filing, supra note 3, at 26589.
21 See id.

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