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

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-104270; File No. SR-NSCC-2025-013]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving of Proposed Rule Change To Amend the CNS Fails Charge in the NSCC Rules</SUBJECT> <DATE>November 25, 2025.</DATE> <HD SOURCE="HD1">I. Introduction</HD> On September 5, 2025, National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”), 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/> proposed rule change SR-NSCC-2025-013 (“Proposed Rule Change”) to modify the NSCC Rules & Procedures (“Rules”) regarding the margin charge applied when a Member fails to settle a Short Position or a Long Position by the applicable settlement date (“CNS Fails Charge”). The Proposed Rule Change was published for comment in the <E T="04">Federal Register</E> on September 16, 2025. <SU>3</SU> <FTREF/> The Commission has received no comments on the Proposed Rule Change. <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <FTNT> <SU>3</SU>   <E T="03">See</E> Securities Exchange Act Release No. 103952 (Sept. 11, 2025), 90 FR 44735 (Sept. 16, 2025) (File No. SR-NSCC-2025-013) (“Notice of Filing”). </FTNT> On September 26, 2025, pursuant to Section 19(b)(2) of the Exchange Act, <SU>4</SU> <FTREF/> the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the proposed rule changes. <SU>5</SU> <FTREF/> For the reasons discussed below, the Commission is approving the Proposed Rule Change. <FTNT> <SU>4</SU>  15 U.S.C. 78s(b)(2). </FTNT> <FTNT> <SU>5</SU>   <E T="03">See</E> Securities Exchange Act Release No. 104094 (Sept. 26, 2025), 90 FR 46977 (Sept. 30, 2025) (File No. SR-NSCC-2025-013). </FTNT> <HD SOURCE="HD1">II. Background</HD> NSCC is a central counterparty, which means that it interposes itself as the buyer to every seller and the seller to every buyer for the financial transactions it clears. NSCC provides CCP services for the U.S. equity market. As such, NSCC is exposed to the risk that one or more Members may fail to make a payment or to deliver securities. <SU>6</SU> <FTREF/> <FTNT> <SU>6</SU>  Capitalized terms not defined herein shall have the meanings ascribed to them in the Rules, <E T="03">available at https://www.dtcc.com/legal/rules-and-procedures.aspx.</E> </FTNT> A key tool that NSCC uses to manage its credit exposures to its Members is the daily collection of the Required Fund Deposit ( <E T="03">i.e.,</E> margin) from each Member. A Member's margin is designed to mitigate potential losses to NSCC associated with liquidation of that Member's portfolio in the event of that Member's default. The aggregate of all NSCC's Members' Required Fund Deposits constitutes the Clearing Fund of NSCC, which 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. <SU>7</SU> <FTREF/> <FTNT> <SU>7</SU>   <E T="03">See</E> Rule 4 (Clearing Fund) and Procedure XV, <E T="03">supra</E> note 6. </FTNT> 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>8</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. <SU>9</SU> <FTREF/> <FTNT> <SU>8</SU>   <E T="03">See</E> NSCC Rule 11 (CNS System) and Procedure VII (CNS Accounting Operation), <E T="03">id.</E> </FTNT> <FTNT> <SU>9</SU>   <E T="03">See</E> Notice of Filing, <E T="03">supra</E> note 3, 90 FR at 44736. </FTNT> Each Member's Required Fund Deposit is comprised of several risk-based component charges, including the CNS Fails Charge. <SU>10</SU> <FTREF/> NSCC calculates and assesses the CNS Fails Charge on a daily basis from Members with CNS Fails Positions, to offset the risk exposures to NSCC and incentivize Members to satisfy their obligations on Settlement Date. NSCC calculates the CNS Fails Charge based on the Member's credit rating derived from the Credit Risk Rating Matrix (“CRRM”), <SU>11</SU> <FTREF/> meaning that, for each Member, it multiplies the Current Market Value for that Member's aggregate CNS Fails Positions by a percentage. <SU>12</SU> <FTREF/> <FTNT> <SU>10</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">supra</E> note 6. </FTNT> <FTNT> <SU>11</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">id.</E> </FTNT> <FTNT> <SU>12</SU>  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. <E T="03">See supra</E> note 10. </FTNT> <HD SOURCE="HD1">III. Description of the Proposed Rule Change</HD> NSCC is proposing to amend the provisions of the Rules regarding the CNS Fails Charge by (i) discontinuing the application of the CNS Fails Charge on Long Positions, and (ii) eliminating the CRRM from the calculation and instead assessing the charge based on the duration that the failed Short Positions remain outstanding, as discussed below. First, the Proposed Rule Change would discontinue the application of the CNS Fails Charge on failed Long Positions. CNS is a net flat system and allocates shares received via an algorithm to those who are set to receive. <SU>13</SU> <FTREF/> 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 whether they will receive shares from CNS if the corresponding Members set to deliver do not deliver shares in their entirety to CNS. NSCC states that, given this limited ability to control if a Member is allocated shares that it is set to receive, it is not appropriate to assess a CNS Fails Charge on Members who fail to receive an allocation from CNS for a Long Position. <SU>14</SU> <FTREF/> Additionally, NSCC states that CNS Fails Positions, including failed Long Positions, are currently subject to NSCC's normal risk margining procedures, and risk associated with these positions is accounted for in the existing risk calculations. <SU>15</SU> <FTREF/> The Proposed Rule Change would revise the definition of CNS Fails Position in Rule 1 to remove the reference to a Long Position. <FTNT> <SU>13</SU>   <E T="03">See</E> Notice of Filing, <E T="03">supra</E> note 3, 90 FR at 44736. </FTNT> <FTNT> <SU>14</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>15</SU>   <E T="03">Id.</E> </FTNT> Second, the Proposed Rule Change would eliminate the use of the CRRM from the CNS Fails Charge calculation, which currently uses a percentage based on each Member's CRRM rating. NSCC states that the risk posed from the fail to deliver is specific to the individual position that is failing, and that a better measure of the risk related to the CNS Fails Position is how long the position has been outstanding. <SU>16</SU> <FTREF/> NSCC states that since the risk posed by the failed position is less influenced by the Member that failed to make delivery, the CNS Fails Charge should not be scaled to Member-specific criteria such as CRRM. <SU>17</SU> <FTREF/> As such, NSCC is proposing to eliminate CRRM from the charge calculation. <FTNT> <SU>16</SU>   <E T="03">Id.</E> at 44737. </FTNT> <FTNT> <SU>17</SU>   <E T="03">Id.</E> </FTNT> Instead, the Proposed Rule Change would assess the CNS Fails Charge based on the length of time a Member has been failing to deliver a position. NSCC states that while its existing margin methodology addresses position-specific risk from a failed position, a position that a Member has failed to deliver for an extended period may be indicative of additional risk associated with the position. <SU>18</SU> <FTREF/> NSCC states that to encourage timely delivery of settlement obligations and address this additional risk, it is proposing to assess the Charge using a percentage ranging from 5% to 100% based on the length of time the position remains outstanding. <SU>19</SU> <FTREF/> <FTNT> <SU>18</SU> ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 25k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━