34-96786: Order Approving Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3, to Revise the Excess Capital Premium Charge
Good evening r/Superstonk, neighborhood jellyfish here looking to review this approved rule that dropped from the NSCC tonight:
DESCRIPTION OF THE PROPOSED RULE CHANGE:
"Put another way, the ECP charge operates to collect additional margin if a member’s exposure to NSCC based on its clearing activity is out of proportion to its capital."
Takeaways from this page:
- NSCC has the ability to waive the charge
- NSCC has estimated the potential impacts of the proposal during the period of June 1, 2020 through December 31, 2021.
- The total aggregate amount that would have been triggered by the proposed calculation if the proposal was effective during that time would have been reduced from $51.31 billion (the actual total amount of ECP charges triggered by the current calculation during that period) to approximately $17.44 billion
Current Calculation and Governance of the ECP Charge :
Amendments to the Calculation of the ECP Charge
Use Members’ Volatility Component Instead of the Calculated Amount. NSCC proposes to replace the Calculated Amount with the amount collected as that member’s volatility component of its margin for purposes of determining the applicability of the ECP charge. The volatility component measures the market price volatility of a member’s portfolio, and it usually comprises the largest portion of a member’s margin.
Currently, determining a member’s Calculated Amount requires a more complicated calculation, as it uses a member’s margin, but excludes certain components and includes other deposits. The proposal would simplify this calculation by using only the volatility component. NSCC states that one of the tools it provides to its members is a calculator that allows them to determine their potential volatility charge based on trading activity, and that, therefore, this proposed change would make the calculation of the ECP charge both clearer and more predictable for members.
Use Net Capital for Broker-Dealer Members and Equity Capital for All Other Members in the Calculation of the ECP Charge. NSCC is proposing to use net capital, rather than excess net capital, for broker-dealer members when calculating the ECP charge. NSCC states that this revision would align the capital measures used for brokerdealer members and other members, which would result in more consistent calculations of the ECP charge across different types of members.
NSCC also states that using net capital rather than excess net capital would provide NSCC with a better measure of the increased default risks presented when a broker-dealer member operates at low net capital levels relative to its margin requirements.
Currently, for all members that are not banks, non-bank trusts or broker-dealers (which generally include, for example, exchanges and registered clearing agencies), NSCC uses those members’ reported equity capital in the calculation of the ECP charge.
No more self reporting for members that are not banks, non-bank trusts or broker-dealers!
NSCC’s Ability to Waive the ECP Charge.
However, NSCC believes that there may still be circumstances when it may not be necessary or appropriate to collect an ECP charge from a member, for example, in certain exigent circumstances when NSCC observes unexpected changes in market volatility or trading volumes. Therefore, NSCC is proposing to retain discretion to waive an ECP charge in certain defined circumstances and to specify the approval required to apply such discretion.
Such instances occurred multiple times in recent years, including, for example, during the extreme market volatility experienced in early 2020 related to the global outbreak of the COVID-19 coronavirus and the meme stock market event in early 2021.
including the degree to which a member’s capital position and trading activity compare or correlate to the prevailing exigent circumstances and whether NSCC can effectively address the risk exposure presented by a member without the collection of the ECP charge from that member.
'if adequate evidence is not available or NSCC does not believe the evidence sufficiently verifies that the member’s capital position has changed'