[Federal Register Volume 85, Number 29 (Wednesday, February 12, 2020)]
[Notices]
[Pages 8046-8048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02790]
[[Page 8046]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88146; File No. SR-NSCC-2019-802]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of No Objection to Advance Notice To Issue Term
Debt as Part of Its Liquidity Risk Management Framework
February 7, 2020.
On December 13, 2019, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') advance notice SR-NSCC-2019-802 (``Advance Notice'')
pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of
1934 (``Exchange Act'') \3\ to issue term debt as part of its Clearing
Agency Liquidity Risk Management Framework (``Framework''). The Advance
Notice was published for public comment in the Federal Register on
January 14, 2020,\4\ and the Commission has received no comments
regarding the changes proposed in the Advance Notice. This publication
serves as notice of no objection to the Advance Notice.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ Securities Exchange Act Release No. 34-87912 (January 8,
2020), 85 FR 2187 (January 14, 2020) (File No. SR-NSCC-2019-802)
(``Notice of Filing'').
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I. The Advance Notice
NSCC has proposed to raise cash through the periodic issuance and
private placement of term debt to qualified institutional investors in
an aggregate amount not to exceed $10 billion, as described in greater
detail below. The cash from the term debt issuances would supplement
NSCC's existing default liquidity resources, which collectively provide
NSCC with liquidity to complete end-of-day settlement in the event of
the default of an NSCC Member.\5\ Such liquidity resources currently
include the proceeds from the issuance and private placement of short-
term, unsecured notes in the form of commercial paper and extendable
notes \6\ and cash that would be obtained by drawing upon NSCC's
committed 364-day credit facility with a consortium of banks.\7\
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\5\ Terms not defined herein are defined in NSCC's Rules and
Procedures (``Rules''), available at http://www.dtcc.com/~/media/
Files/Downloads/legal/rules/nscc_rules.pdf. The events that
constitute a Member default are specified in NSCC's Rule 46
(Restrictions on Access to Services), which provides that NSCC's
Board of Directors may suspend a Member or prohibit or limit a
Member's access to NSCC's services in enumerated circumstances,
which include, for example, default in delivering funds or
securities to NSCC or experiencing such financial or operational
difficulties for which NSCC determines, in its discretion, that
restriction on access to services is necessary for its protection
and for the protection of its Members.
\6\ See Securities Exchange Act Release Nos. 75730 (August 19,
2015), 80 FR 51638 (August 25, 2015) (File No. SR-NSCC-2015-802);
82676 (February 9, 2018), 83 FR 6912 (February 15, 2018) (File No.
SR-NSCC-2017-807).
\7\ See Securities Exchange Act Release No. 80605 (May 5, 2017),
82 FR 21850 (May 10, 2017) (File Nos. SR-DTC-2017-802; SR-NSCC-2017-
802).
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A. General Terms of the Term Debt Issuances
NSCC expects the average maturity of the term debt would range
between two and ten years. The term debt would be represented by
unsecured, unsubordinated and non-convertible medium-term and long-term
global notes held in the name of The Depository Trust Company
(``DTC''), or its nominee, Cede & Co.\8\ The notes would be issued and
transferred only through the book-entry system of DTC.
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\8\ Supra note 4, at 5.
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The term debt would be issued to qualified institutional investors
through private placements and offered in reliance on an exemption from
registration under Section 4(a)(2) of the Securities Act of 1933.\9\
NSCC would be party to certain transaction documents in connection with
each issuance and private placement, including an indenture with the
trustee and purchase agreements.\10\ The purchase agreements would each
be based on the standard form of dealer agreement for similar debt
issuances, which is published by the Securities Industry and Financial
Markets Association.
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\9\ 15 U.S.C. 77d(a)(2).
\10\ NSCC states that it will engage a trustee and underwriting
banks to issue the term debt to qualified institutional investors.
Supra note 4, at 4.
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NSCC intends to time each debt issuance and stagger maturity dates
of each issuance in order to ladder the maturities to avoid
concentrations of maturities. NSCC also would have the ability to make
use of optional features to call any of the issued term debt, in whole
or in part, at any time prior to the maturity date of that debt, and
the issued term debt may contain renewable terms. The term debt would
be interest bearing at either fixed or floating interest rates that are
set at market rates customary for such type of debt and reflective of
the creditworthiness of NSCC.
Under the proposal, NSCC would be authorized to issue an aggregate
amount of up to $10 billion in term debt and has represented that it
expects the average amount issued and outstanding at any time to be
approximately $2-3 billion, as necessitated by its default liquidity
needs.\11\ NSCC estimates that each issuance would be in an amount
between approximately $250 million and $1.5 billion, with an initial
issuance expected to be approximately $1 billion.
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\11\ Supra note 4, at 4.
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NSCC has stated that, in accordance with its Clearing Agency
Investment Policy, NSCC would hold the proceeds from the issuance of
term debt in either its cash deposit account at the Federal Reserve
Bank of New York (``FRBNY'') or in accounts at other creditworthy
financial institutions.\12\ These amounts would be available to draw to
complete settlement as needed.
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\12\ See Securities Exchange Act Release Nos. 79528 (December
12, 2016), 81 FR 91232 (December 16, 2016) (File Nos. SR-DTC-2016-
007, SR-FICC-2016-005, SR-NSCC-2016-003); 84949 (December 21, 2018),
83 FR 67779 (December 31, 2018) (File Nos. SR-DTC-2018-012, SR-FICC-
2018-014, SR-NSCC-2018-013) (approving the Clearing Agency
Investment Policy). NSCC has stated that, in the event that the
Commission does not object to the Advance Notice, and NSCC then has
the authority to issue the term debt, NSCC will file a proposed rule
change with the Commission pursuant to Section 19(b)(1) of the
Exchange Act, and the rules thereunder, to amend the Clearing Agency
Investment Policy to include the proceeds of the debt issuance as
default liquidity funds, within the definition of ``Investable
Funds,'' as such term is defined therein, and provide that such
amounts would be held in bank deposits at eligible commercial banks
or at NSCC's cash deposit account at the FRBNY. See 15 U.S.C.
78s(b)(1).
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B. NSCC's Liquidity Risk Management
As a central counterparty (``CCP''),\13\ NSCC occupies an important
role in the securities settlement system by interposing itself between
counterparties to financial transactions, becoming the buyer to each
seller and seller to each buyer to ensure the performance of contract,
thereby reducing the risk faced by its Members and contributing to
global financial stability. NSCC's liquidity risk management plays an
integral part in NSCC's ability to perform its role as a CCP. If a
Member defaults, NSCC, as CCP, would need to complete settlement of
guaranteed transactions on the failing Member's behalf from the date of
default through the remainder of the settlement cycle (currently two
days for securities that settle on a regular way basis in the U.S.
markets).
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\13\ 17 CFR 240.17Ad-22(a)(1).
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NSCC's Framework sets forth NSCC's liquidity risk management
strategy to maintain sufficient liquidity resources in order to meet
the potential funding
[[Page 8047]]
required to settle outstanding transactions of a defaulting Member in a
timely manner.\14\ The Framework also addresses how NSCC meets its
requirement to hold qualifying liquid resources, as such term is
defined in Rule 17Ad-22(a)(14) under the Act,\15\ sufficient to meet
its minimum liquidity resource requirement in each relevant currency
for which it has payment obligations owed to its Members.
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\14\ See Securities Exchange Act Release No. 82377 (December 21,
2017), 82 FR 61617 (December 28, 2017) (File Nos. SR-DTC-2017-004;
SR-FICC-2017-008; SR-NSCC-2017-005).
\15\ 17 CFR 240.17Ad-22(a)(14).
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NSCC considers each of its existing default liquidity resources to
be qualifying liquid resources.\16\ These resources include: (1) The
cash in NSCC's Clearing Fund; \17\ (2) cash that would be obtained by
drawing upon NSCC's committed 364-day credit facility with a consortium
of banks; \18\ (3) additional cash deposits, known as ``Supplemental
Liquidity Deposits,'' designed to cover the heightened liquidity
exposure arising around monthly option expiry periods, required from
those Members whose activity would pose the largest liquidity exposure
to NSCC; \19\ and (4) cash proceeds from the issuance and private
placement of short-term, unsecured notes in the form of commercial
paper and extendable notes (``Commercial Paper Program'').\20\
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\16\ Id.
\17\ See Rule 4 and Procedure XV of the Rules, supra note 14.
\18\ See Securities Exchange Act Release No. 80605 (May 5,
2017), 82 FR 21850 (May 10, 2017) (File Nos. SR-DTC-2017-802; SR-
NSCC-2017-802).
\19\ Supplemental Liquidity Deposits are described in Rule 4A of
the Rules.
\20\ See Securities Exchange Act Release Nos. 75730 (August 19,
2015), 80 FR 51638 (August 25, 2015) (File No. SR-NSCC-2015-802);
82676 (February 9, 2018), 83 FR 6912 (February 15, 2018) (File No.
SR-NSCC-2017-807).
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The proceeds from the term debt issuances would supplement NSCC's
existing default liquidity resources and provide NSCC with an
additional resource it may use to meet its liquidity needs, as measured
pursuant to the Framework.\21\ Further, NSCC would consider the
proceeds from the term debt issuances to be a qualifying liquid
resource under the Framework.\22\
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\21\ Supra note 14. NSCC will file a proposed rule change with
the Commission pursuant to Section 19(b)(1) of the Exchange Act, and
the rules thereunder, to amend the Framework to include the proceeds
of the debt issuance as an additional qualifying liquidity resource
of NSCC. See supra note 12; 15 U.S.C. 78s(b)(1).
\22\ Supra note 4, at 7.
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II. Discussion and Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: To mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for SIFMUs and
strengthening the liquidity of SIFMUs.\23\
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\23\ See 12 U.S.C. 5461(b).
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Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\24\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a): \25\
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\24\ 12 U.S.C. 5464(a)(2).
\25\ 12 U.S.C. 5464(b).
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To promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among others areas.\26\
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\26\ 12 U.S.C. 5464(c).
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The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\27\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\28\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the proposal in the Advance
Notice is consistent with the objectives and principles described in
Section 805(b) of the Clearing Supervision Act,\29\ and in the Clearing
Agency Rules, in particular Rule 17Ad-22(e)(7).\30\
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\27\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). The Commission established an effective date of
December 12, 2016 and a compliance date of April 11, 2017 for the
Covered Clearing Agency Standards. NSCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5).
\28\ Id.
\29\ Supra note 25.
\30\ 17 CFR 240.17Ad-22(e)(7).
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A. Consistency With Section 805(b) of the Clearing Supervision Act
For the reasons discussed immediately below, the Commission
believes that the Advance Notice is consistent with the stated
objectives and principles of Section 805(b) of the Clearing Supervision
Act.\31\
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\31\ Supra note 25.
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NSCC's issuance of term debt would provide it with an additional
liquid resource that NSCC could access in the event of a Member
default, supplementing NSCC's existing default liquidity resources and
diversifying the type and source of such resources. The Commission
believes that the proposal to issue term debt up to an aggregate amount
of $10 billion, and use the proceeds as a default liquidity resource,
is designed to promote robust liquidity risk management at NSCC by
diversifying the set of liquid resources available to NSCC in the event
of a Member default that, in turn, would allow NSCC to continue to meet
its settlement obligations to its Members in a timely fashion. While
the Commission notes that the proposed issuance of term debt could
bring certain financial risks,\32\ the Commission believes that in the
event such risks were to materialize, the ability of NSCC to use other
liquidity tools \33\ helps promote NSCC's ability to manage liquidity
risk through an overall diversified range of risk management tools.
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\32\ The risks include maturity risk, rollover risk, interest
rate risk, and financial risk. Supra note 4, at 9-10.
\33\ NSCC's other liquidity tools include: (1) NSCC's Clearing
Fund (consisting of cash and U.S. Treasury securities); (2) NSCC's
committed 364-day credit facility with a consortium of banks; (3)
Supplemental Liquidity Deposits, which are cash deposits designed to
cover the heightened liquidity exposure arising around monthly
option expiry periods by Members whose activity would pose the
largest liquidity exposure to NSCC during such periods; and (4) cash
proceeds from the issuance and private placement of short-term,
unsecured notes as part of NSCC's Commercial Paper Program. Supra
note 4, at 7.
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The Commission also believes that the term debt issuance, as
proposed and in light of NSCC's current finances and its approach to
financial risk management, would promote safety and soundness by
[[Page 8048]]
enabling NSCC to obtain additional and diversified liquid resources to
cover a liquidity gap that could arise in the event of a Member
default. By covering such a gap, the proposal complements NSCC's
ability to meet its settlement obligations in the event of a Member
default, thereby reducing the risk of loss contagion (i.e., the risk of
losses arising at other NSCC Members if NSCC is unable to deliver cash
or securities on the defaulting Member's behalf). Reducing the risk of
loss contagion during a Member default, in turn, enhances the ability
of NSCC and its Members to continue to provide stability and safety to
the financial markets they serve. Therefore, by enhancing NSCC's
ability to address losses and liquidity pressures that otherwise might
cause financial distress to NSCC or its Members, the Advance Notice
promotes safety and soundness.
The Commission also believes that NSCC's proposal is consistent
with reducing systemic risks and supporting the stability of the
broader financial system. Reducing the risk of loss contagion would
attenuate the transmission of financial shocks from defaulting Members
to non-defaulting Members. Accordingly, the proposal would support the
stability of the broader financial system. Thus, the Commission
believes that the proposal reflected in the Advance Notice is
consistent with the stated objectives and principles of Section 805(b)
of the Clearing Supervision Act.
B. Consistency With Rule 17Ad-22(e)(7)
The Commission believes that the proposal described in the Advance
Notice is consistent with the requirements of Rule 17Ad-22(e)(7) under
the Exchange Act. Rule 17Ad-22(e)(7) requires NSCC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively measure, monitor, and manage
liquidity risk that arises in or is borne by NSCC, including measuring,
monitoring, and managing its settlement and funding flows on an ongoing
and timely basis, and its use of intraday liquidity, as specified in
the rule.
1. Consistency With Rule 17Ad-22(e)(7)(i)
In particular, Rule 17Ad-22(e)(7)(i) under the Exchange Act
requires that each covered clearing agency establish, implement,
maintain and enforce written policies and procedures reasonably
designed to ``effectively measure, monitor, and manage the liquidity
risk that arises in or is borne by [it], including measuring,
monitoring, and managing its settlement and funding flows on an ongoing
and timely basis, and its use of intraday liquidity by . . .
[m]aintaining sufficient liquid resources at the minimum in all
relevant currencies to effect same-day . . . settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios that includes, but is not limited to, the
default of the participant family that would generate the largest
aggregate payment of obligation for the covered clearing agency in
extreme but plausible conditions.''
As described above, the proposed issuance of term debt would
increase the readily-available liquidity resources available to NSCC to
continue to meet its liquidity obligations in a timely fashion in the
event of a Member default. The funds could help maintain sufficient
liquidity resources to effect same-day settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios. Additionally, the term debt issuance is
designed to help ensure that NSCC has sufficient, readily available
qualifying liquid resources to meet the cash settlement obligations of
its largest family of affiliated Members. Therefore, the Commission
finds that the proposal is consistent with Rule 17Ad-22(e)(7)(i).
2. Consistency With Rule 17Ad-22(e)(7)(ii)
Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires each covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to ``effectively measure,
monitor, and manage the liquidity risk that arises in or is borne by
[it], including measuring, monitoring, and managing its settlement and
funding flows on an ongoing and timely basis, and its use of intraday
liquidity by . . . holding qualifying liquid resources sufficient'' to
satisfy payment obligations owed to clearing members. Rule 17Ad-
22(a)(14) under the Exchange Act defines ``qualifying liquid
resources'' to include, among other things, cash held either at the
central bank of issue or at creditworthy commercial banks.
As described above, the proposed issuance of term debt would enable
NSCC to hold additional cash proceeds from the issuance of the term
debt in a cash deposit account at the Federal Reserve Bank of New York
or a bank counterparty that has been approved pursuant to NSCC's
Clearing Agency Investment Policy. Because the funds would be held at
the Federal Reserve Bank of New York or a bank counterparty, they would
be a qualifying liquid resource, as that term is defined in Rule 17Ad-
22(a)(14).\34\ Therefore, the Commission believes that the proposal is
consistent with Rule 17Ad-22(e)(7)(ii).
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\34\ 17 CFR 240.17Ad-22(a)(14) (``Qualifying liquid resources
means, for any covered clearing agency, . . . (i) cash held either
at the central bank of issue or at creditworthy commercial banks . .
.'').
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III. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-NSCC-2019-802) and that NSCC is authorized to
implement the proposed change as of the date of this notice.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-02790 Filed 2-11-20; 8:45 am]
BILLING CODE 8011-01-P