Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the CNS Fails Charge in the NSCC Rules

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-103952; File No. SR-NSCC-2025-013]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the CNS Fails Charge in the NSCC Rules</SUBJECT> <DATE>September 11, 2025.</DATE> Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  <SU>1</SU> <FTREF/> and Rule 19b-4 thereunder, <SU>2</SU> <FTREF/> notice is hereby given that on September 5, 2025, National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the clearing agency. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <HD SOURCE="HD1">I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change</HD> The proposed rule change consists of amendments to provisions in the NSCC Rules & Procedures (“Rules”) regarding the margin charge that is applied when a Member fails to settle a Short Position or a Long Position by the applicable settlement date (“CNS Fails Charge”). <SU>3</SU> <FTREF/> Specifically, the proposed changes would (i) discontinue the application of the CNS Fails Charge on Long Positions ( <E T="03">i.e.,</E> fails to receive), (ii) eliminate the Credit Risk Rating Matrix (“CRRM”)  <SU>4</SU> <FTREF/> from the calculation, and (iii) assess the charge based on the duration that the failed Short Positions remains outstanding. <SU>5</SU> <FTREF/> <FTNT> <SU>3</SU>  The CNS Fails Charge is currently imposed by NSCC pursuant to Procedure XV (Clearing Fund Formula and Other Matters), Section I.(A)(1)(d). <E T="03">Id.</E> </FTNT> <FTNT> <SU>4</SU>  The CRRM is a credit risk rating model NSCC utilizes to evaluate and rate the credit risk of NSCC's U.S. bank, foreign bank, and U.S. broker-dealer Members, and rate such Members based upon qualitative and quantitative information. <E T="03">See</E> definition of Credit Risk Rating Matrix in Rule 1 (Definitions and Descriptions), <E T="03">infra</E> note 5. </FTNT> <FTNT> <SU>5</SU>  Terms not defined herein are defined in the Rules, <E T="03">available at www.dtcc.com/legal/rules-and-procedures.</E> </FTNT> <HD SOURCE="HD1">II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. <HD SOURCE="HD2">(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> <HD SOURCE="HD3">1. Purpose</HD> The proposed rule change would amend provisions in the Rules regarding the CNS Fails Charge. Specifically, the proposed changes would (i) discontinue the application of the CNS Fails Charge on Long Positions ( <E T="03">i.e.,</E> fails to receive), (ii) eliminate the CRRM from the calculation, and (iii) assess the charge based on the duration that the failed Short Positions remains outstanding. <HD SOURCE="HD3">(i) Overview of the Required Fund Deposit and the CNS Fails Charge</HD> As part of its market risk management strategy, NSCC manages its credit exposure to Members by calculating the appropriate Required Fund Deposits to the Clearing Fund and monitoring the Clearing Fund's sufficiency, as provided for in the Rules. <SU>6</SU> <FTREF/> The Required Fund Deposit serves as each Member's margin. <FTNT> <SU>6</SU>   <E T="03">See</E> Rule 4 (Clearing Fund) and Procedure XV, <E T="03">supra</E> note 5. NSCC's market risk management strategy is designed to comply with Rule 17ad-22(e)(4) under the Act, where these risks are referred to as “credit risks.” 17 CFR 240.17ad-22(e)(4). </FTNT> The objective of an NSCC Member's deposit is to mitigate potential losses to NSCC associated with a default by an NSCC Member. Each NSCC Member's Required Fund Deposit is comprised of several risk-based component charges, including the CNS Fails Charge, which is calculated and assessed daily. The aggregate of all Members' Required Fund Deposits constitutes the Clearing Fund of NSCC. NSCC would access its Clearing Fund should a defaulting Member's own Required Fund Deposit be insufficient to satisfy losses to NSCC caused by the liquidation of that Member's portfolio. The Clearing Fund reduces the risk that NSCC would need to mutualize any losses among non-defaulting members during the liquidation process. When a Member does not either deliver a Short Position or receive a Long Position due by the applicable Settlement Date, NSCC, as a central counterparty, is exposed to credit and market risks. To offset the risk exposures to NSCC and to incentivize Members to satisfy their obligations relating to their outstanding trades on Settlement Date, NSCC currently calculates and collects the CNS Fails Charge from Members with Short Positions and Long Positions that did not settle on the Settlement Date (“CNS Fails Positions”). The amount of the CNS Fails Charge imposed on a Member varies based on the Member's credit rating derived from the CRRM. The CNS Fails Charge is calculated by multiplying the Current Market Value for such Member's aggregate CNS Fails Positions by a percentage. For a Member that is not rated on the CRRM and for a Member that is rated 1 through 4 on the CRRM, the CNS Fails Charge is 5% of the Member's aggregate CNS Fails Positions. For a Member that is rated 5 or 6 on the CRRM, the CNS Fails Charge is 10% of the Member's aggregate CNS Fails Positions. For a Member that is rated 7 on the CRRM, the CNS Fails Charge is 20% of the Member's aggregate CNS Fails Positions. <HD SOURCE="HD3">(ii) Proposed Changes to the CNS Fails Charge</HD> NSCC regularly assesses its margining methodologies to evaluate whether margin levels are commensurate with the particular risk attributes of each relevant product, portfolio, and market. In connection with such reviews, NSCC is proposing to enhance the CNS Fails Charge by (a) discontinuing the application of the CNS Fails Charge on Long Positions, (b) eliminating the CRRM from the calculation, and (c) assessing the charge based on the duration that the Short Position has been failing to be delivered as discussed below. <HD SOURCE="HD3">(a) Discontinue CNS Fails Charge on Long Positions</HD> NSCC's Continuous Net Settlement System (“CNS”) is an automated accounting and securities settlement system that centralizes and nets the settlement of compared and recorded securities transactions and maintains an orderly flow of security and money balances. <SU>7</SU> <FTREF/> Within CNS, all eligible compared and recorded transactions for a particular Settlement Date are netted by issue into one position per Member. The position can be a net Long Position (receive), net Short Position (deliver) or flat. As a continuous net system, those positions are further netted with positions of the same CNS Security that remain open after their original scheduled settlement date (usually one business day after the trade date or T+1), so that transactions scheduled to settle on any day are netted with CNS Fails Positions ( <E T="03">i.e.,</E> positions that have failed in delivery or receipt on the Settlement Date), which results in a single deliver or receive obligation for each Member for each CNS Security in which the Member has activity. <FTNT> <SU>7</SU>   <E T="03">See</E> NSCC Rule 11 (CNS System) and Procedure VII (CNS Accounting Operation), <E T="03">supra</E> note 5. </FTNT> CNS is a net flat system and allocates shares received via an algorithm to those who are set to receive. CNS can only allocate shares if a Member with a Short Position makes the delivery into CNS on the Settlement Date. Members have limited control  <SU>8</SU> <FTREF/> on whether they will receive shares from CNS if the corresponding Members set to deliver do not deliver shares in their entirety to CNS. Given this limited ability to control if they are allocated shares that they are set to receive, NSCC believes it is not appropriate to assess a CNS Fails Charge on Members who fail to receive an allocation from CNS for a Long Position. <FTNT> <SU>8</SU>  NSCC provides a “Buy-In” process which enables receiving Members to (i) submit a Buy-In Intent and receive priority on allocation of receipt of securities and (ii) allow Members that have failed to receive securities by settlement date the ability to purchase the securities in the market to cover their fails position. <E T="03">See</E> Section J of Procedure VII and Procedure X (Execution of Buy-Ins), <E T="03">supra</E> note 5. </FTNT> In addition, CNS Fails Positions, including Long Positions where the Member failed to receive, are currently subject to NSCC's normal risk margining procedures and risk associated with these positions is accounted for in the existing risk calculations. Fail positions are re-netted into Members' unsettled guaranteed portfolios, which is subject to NSCC's full margin methodology. The CNS Fails Charge, while part of that methodology, is an additive charge on top of the model-based components and any Market-to-Market collected. As part of its ongoing review of risk management programs—and in conjunction with other proposed changes to the CNS Fails Charge outlined ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 28k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━