Dear Ms. Countryman,
I am writing as a retail investor to submit a petition for rulemaking under Rule 192 of the Securities and Exchange Commission’s (“SEC”) Rules of Practice, requesting amendments to the National Securities Clearing Corporation (“NSCC”) Rules & Procedures.
Specifically, I propose revisions to Rules 4, 18, and 22 to address several critical issues related to settlement of guaranteed transactions, central counterparty (CCP) resilience, and overall financial market stability.
It has come to the attention of retail investors that NSCC Rules and Procedures do not codify strict procedures for closing out positions (e.g., in the event of a Member default). Per NSCC’s Disclosure Framework for Covered Clearing Agencies and
Financial Market Infrastructures, “[a]s a cash market CCP, if a Member defaults, NSCC will need to complete settlement of guaranteed transactions on the failing Member’s behalf” [4 “Liquidity risk management framework”]. However, NSCC Rule 18 SEC. 6(a) contains
a provision that “if, in the opinion of the Corporation, the close out of a position in a specific security would create a disorderly market in that security, then the completion of such close-out shall be in the discretion of the Corporation”.
The existing framework inadvertently incentivises Members to build up large positions that could become disorderly if closed out, thus becoming de facto “Too Big To Fail.” This misalignment of incentives can lead to systemic risks and a potential
bailout scenario where losses are socialised.
As such, members may exploit the discretion afforded by the NSCC to perpetuate market distortions, such as through naked short positions. This can create artificial inflation of supply and disrupt market stability, with the CCPs bearing the risk
and cost of unwinding such positions.
The costs associated with closing out disorderly positions should not solely fall on CCPs and the general public. Financial market participants responsible for creating these positions should bear the costs. The current rules fail to ensure that
those responsible for creating risky positions are held accountable for the associated costs.
To address these issues, I propose the following changes to the NSCC Rules:
NSCC Rule 4 Proposed Change
SEC. 4. Loss Allocation Waterfall, Off-the-Market Transactions.
Each Member [, including its executives,] shall be obligated to the Corporation for the entire amount of any loss or liability incurred by the Corporation arising out of or relating to any Defaulting Member Event with respect to such Member. [To
the extent that such loss or liability is not satisfied by the Member, all executives of the Member (past or present) shall be obligated to the Corporation for an amount equivalent to the preceding 5 years of compensation from the Member.] To the extent that
such loss or liability is not satisfied pursuant to Section 3 of this Rule 4, the Corporation shall apply a Corporate Contribution thereto and charge the remaining amount of such loss or liability ratably to other Members, as further provided below.
NSCC Rule 18 Proposed Change
SEC. 6. (a) Promptly after the Corporation has given notice that it has ceased to act for the Member, and in a manner consistent with the provisions of Section 3, the Net Close Out Position with respect to each CNS Security shall be closed out (whether
it be by buying in, selling out or otherwise liquidating the position) by the Corporation--; provided however, if, in the opinion of the Corporation, the close out of a position in a specific security would create a disorderly market in that security, then
the completion of such close-out shall be in the discretion of the Corporation--.
NSCC Rule 22 Proposed Change (Option A – Public Notice)
RULE 22. SUSPENSION OF RULES
The time fixed by these Rules, the Procedures or any regulations issued by the Corporation for the doing of any act or acts may be extended or the doing of any act or acts required by these Rules, the Procedures or any regulations issued by the Corporation
may be waived or any provision of these Rules, the Procedures or any regulations issued by the Corporation may be suspended by the Board of Directors or by the Chairman of the Board, the President, the General Counsel or such other officers of the Corporation
having a rank of Managing Director or higher whenever, in its or his judgment, such extension, waiver or suspension is necessary or expedient.
A written report of any such extension, waiver or suspension (other than an extension of time of less than eight hours), stating the pertinent facts, the identity of the person or persons who authorized such extension, waiver or suspension and the
reason such extension, waiver or suspension was deemed necessary or expedient, shall be promptly made [and published on the Corporation’s website for access by the general public within 1 business day] and filed with the Corporation’s records and shall be
available for inspection by any [person,] Member, Mutual Fund/Insurance Services Member, Municipal Comparison Only Member, Insurance Carrier/Retirement Services Member, TPA Member, TPP Member, Investment Manager/Agent Member, Fund Member, Data Services Only
Member or AIP Member during regular business hours on Business Days. Any such extension or waiver may continue in effect after the event or events giving rise thereto but shall not continue in effect for more than 60 calendar days after the date thereof unless
it shall be approved [by] the Board of Directors within such period of 60 calendar days [with a written report made and published as described by this paragraph].
[The time fixed by these Rules, the Procedures or any regulations issued by the Corporation for the doing of any act or acts may not be extended. The doing of any act or acts required by these Rules, the Procedures or any regulations issued by the Corporation
may not be waived and any provision of these Rules, the Procedures or any regulations issued by the Corporation may not be suspended.
A written report of any deviation from these Rules, Procedures or any regulations issued by the Corporation (including extension, waiver or suspension), stating the pertinent facts, the identity of the person or persons who authorized such extension,
waiver or suspension and the reason such extension, waiver or suspension was deemed necessary or expedient, shall be promptly made and published on the Corporation’s website for access by the general public within 1 business day and filed with the Corporation’s
records and shall be available for inspection by any person, Member, Mutual Fund/Insurance Services Member, Municipal Comparison Only Member, Insurance Carrier/Retirement Services Member, TPA Member, TPP Member, Investment Manager/Agent Member, Fund Member,
Data Services Only Member or AIP Member during regular business hours on Business Days.
Final Remarks
These proposed changes aim to create a fairer, more transparent, and resilient financial system. By implementing stricter rules and holding responsible parties accountable, we can better manage risks, prevent market distortions, and ensure that losses
are absorbed by those who create the risks.
Thank you for considering this petition. I respectfully request prompt action on these proposed amendments to safeguard the interests of all market participants.
Sincerely,
A Concerned Retail Investor