55 WATER STREET NEW YORK, NY 10041-0099

TEL: 212-855-7522D“rC C rnpozrnanter@dtcc.com

February 22, 2013

Elizabeth M. Murphy Secretary Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-1090

Re: File Nos. SR-NSCC-2012-10 / SR-NSCC-2012-810 Securities and Exchange Commission (“SEC” or “Commission”) SEC Release Nos. 34-68549 (December 28, 2012) / 34-68621 (January 10, 2013)

Dear Ms. Murphy,

National Securities Clearing Corporation (“NSCC”) appreciates the opportunity to respond to the comment letter submitted by LEK Securities Corporation (the “LEK Letter”) with respect to NSCC’s rule filing SR-NSCC-2012-10, and the related advance notice SR-NSCC-2012-810 (collectively referred to as the “Filing”), in which NSCC is proposing to eliminate the offset (the “ID Offset”) of NSCC obligations with institutional delivery (ID) transactions that settle at The Depository Trust Company (DTC) for the purpose of calculating NSCC Clearing Fund under Procedure XV of NSCC’s Rules & Procedures (the “Rules”). As described in greater detail in the Filing, the proposal is intended to eliminate the market risk that, in the event NSCC ceases to act for a Member with pending ID transactions, it will be unable to complete those pending ID transactions in the timeframe contemplated by its current Clearing Fund calculations and, as a result, without sufficient margin in its Clearing Fund, will be under collateralized.

Executive Summary

As the LEK Letter correctly points out, NSCC occupies an important role within the financial services industry by facilitating the prompt and accurate clearance and settlement of securities transactions. As a central counterparty, NSCC interposes itself between counterparties to financial transactions, and through its trade guarantee, NSCC assumes the buyer’s credit risk and the seller’s delivery risk in the event either party defaults prior to settlement. As such, NSCC necessarily is faced with certain risks; including credit risk, which is the risk that a counterparty will be unable to meet its financial obligations when due, and market risk, which is the risk that a central counterparty will be unable to complete a guaranteed transaction of a defaulted Member at the original trade price and will suffer a loss.

NSCC measures and manages its credit and market risk exposure through its assessment of daily Clearing Fund (margin) requirements on its Members. As a primary mitigant to these risks, NSCC’s Clearing Fund is calculated to ensure it has on deposit assets sufficient to satisfy losses

may be by as the the a and the close

Fund to to this risk loss, is each ID Offset,

are to ID a and by the and the

Fund into (i.e. ID In this way, the ID

to the by to ID that are and the for those

ID on the that, in the event a be able to there a

ID at The Company, by that ID to side

the ID and at in the

a focus on risk and, as a the and (the Act

1934 (the to SEC and as a VIII the Wall Street

and its risk

to the ID is to the by the SEC

the (the in NSCC to its losses from its to use

to its to require to the to it in “extreme

to it faced in The

and, and its from the loss from a

of

of

incurred NSCC result of default of Memberthat otherwise out of that Member’s unsettled positions under NSCC’s trade guaranty.resultant

coverprovide sufficient fundsformula is designedBecause NSCC’s Clearing of margin Member’s trading activity. The existingcollected based on

significant,party transactions withhowever, provides NSCC Members that Value-at-Riskdisproportionate benefit Market Maker components’ ofcalculating

non-fail) transactions thatClearing after taking account any offsetting pending Offset effectively eliminates Clearinghave been confirmed and/or affirmed.

transactionsthose counterpartiesrisk presentedFund charges with respect Clearing Fund requirementsignificantly reducesnot Members of NSCC,

offaulty assumptiontransactions. BasedMembers with offsetting isclose out any trades for whichMember insolvency, NSCC will

NSCC’s affiliate,corresponding Depository Trusttransaction settling ofthe marketcompleting transaction, NSCC takes inadequate margin with respect

trades leaves itself event of a Memberrisk of being under collateralized default.

both clearing agency registeredmitigation,NSCC continuously pursues ofwith Securities “SEC”) under the Securities ExchangeExchange Commission

inspection“Act”), subject systemically importantoversight, and Dodd-Frankoffinancial market infrastructure, designated under Title

Reform Consumer Protection Act (“Dodd-Frank Act”), NSCC necessarily reviews mitigation processes against applicable regulatory and industry standards.

remove Offset expressly designed facilitate NSCC’s complianceThis proposal Clearing Agency Standards for Operation and Governance, recently adoptedwith

particular the rules that require“Clearing Agency Standards”),Actunder Member andmanage margindefaults ofexposures to potential

limit credit exposures NSCCAdditionally, these rulesMembers.2requirements butrisks presentedmaintain risk management processes that address

may not haveanticipate risks thatplausible market conditions”, requiring NSCC past market conditions.3 proposal ensures that NSCC’s Clearing Fund calculation is in

importantly, protects both NSCCcompliance with these regulatory requirements, Member default.that could resultrisk ofmembership

These Clearing Fund components are described in greater detail in the Filing, and in Procedure XV of NSCC’s

Rules. l7Ad-22(b)(l), which requires NSCC to “limit its exposures to potential losses from defaults by itsSee Rule

the CCP will not be disrupted andparticipants under normal market conditions so that the operations non-Rule 1 7Ad-22(b)(2),defaulting participants will not be exposed to losses that they cannot anticipate or control”;

which requires NSCC to “use margin requirements to limit its credit exposures to participants under normal market

conditions”; and Rule l7A-22(d)(l 1), which requires NSCC to “establish default procedures that ensure that the liquidity pressures and to continue meeting itsclearing agency can take timely action to contain losses and

obligations in the event a participant default”; 17 CFR Part 240, adopting Release No. 34-68080; File No. S7-08­

11 (Jan. 2,2013), available at http://www.sec.gov/rules/final/2012/34-68080.pdf. See Rule l7Ad-22(b)(3) (Financial Resources).

2

2

The a to the to the ID from

Rules, and we below.

to

1.

The LEK are to in Clearing

Fund “will be out and its less Letter, 1-2).

A vital is a that

the to the to clear be able to

the to to the an the its to are to the ongoing

are forced to but rather

may to It be that agency

do

the to the ID will Fund to has its and in

will be the the notice

the changes. in the an the the ID Offset on

the time, NSCC and would

a to 25%, and to to schedule

to the and to the impact

the In 2011, an a the to the ID

The was in a 2011 also in 2011

and made on

In March 2011, a from the law & LLP,

as A, are a as B, and, in

2011, the an study. a

group its was to reduce

the the was to the will be by

in the 18-month, is

the is to give to for the

in

See Important Notice A# 7136, P&S# 6706, dated January 7, 2011, available at

http://www.dtcc.com/down1oads/1ega1/imp_notices/201 I/nscc/a7 36.pdf

proposal remove Offsetnumber of objectionsLEK Letter makes address those pointsNSCC’s

Response LEK Letter

NSCC Guaranty

their NSCCpay any increaseunableLetter states that firms that forced further that NSCC could accomplishof business”requirement

harmful alternatives (LEKgoals through pages

Clearing Fund calculation

reflects component of NSCC’s risk management processes

clearing agency. Firms that chooserisks those transactions present NSCC’s membershipdirectly through NSCC meetfinancial transactions must

ability amount that accuratelyClearing Fundcontributerequirements, including meetunablereflects risks NSCC. Firms thatactivity presents

not necessarily discontinue their business,requirements of membership clear transactions through other NSCC Members. notedshouldchoose

currently clear through other NSCC Members.brokers

proposal ClearingOffsetWhile NSCC recognizes that causeremove particularmembership,providedincrease, NSCCrequirements of certain firms

ofproposal, significant advance July 2010, NSCC began sharing study

most fromimpactedthose Members that Starting directlyimpactresults of

impact of removingThese study results reflectedwith impacted Members. study period. At thatClearing Fund required deposits during

Risk Management staff met with Members that Members’

EnterpriseRelationship Management otherhave experienced change their Clearing Fund requirement of greater than

contact their NSCC Relationship Managersimpacted Members were invited mitigateproposal possible alternativesdiscussmeetings with NSCC staff

Januaryof proposed changes. Important Notice that identifiedNSCC issued Offset.4eliminateproposalnumber of planned risk management changes, including

JanuarypublishedDevelopment Agenda,also includedproposal NSCC’s website.publicly available

attachedGuilianiletter firm of BracewellNSCC received identified therein. NSCChereto on behalf of certain Members of NSCC thatExhibit

Exhibit Mayaddressing the concerns raisedletter, attached heretoresponded with results of At that time, NSCC formedupdated impactNSCC released

of tasked with identifying alternative approachesMembers thatworking unable identify an alternative proposal thatimpact of While that groupproposal.

risk that the proposal, the group’s discussionsmitigatedwould adequately address nowtiered implementation timeframe, whichdevelopment of andid result

potentialMembers additional timedesignedFiling and preparepart of Clearing Fund requirement.increase

1

3

As to the

to for the its impact.

2. to

The LEK that, the to from to on the it is

to why the are Letter,

2).

its critical role in in the is to

to to the and to its 5 In

the in to to the

a the SEC stated, “.

the face are to to the for

in the and are by can in the

6 As such, on as risks when

its it be to do so, in light

the most As in firms,

in and at than in the

past, as and and in the

risk in the past. it to

its the losses the any its and

it does so, in part, by by the

it clears, the type firm to the

agency.

3.

The LEK will not lose as a can to

Letter, 2), any

Since the ID the gone the rise

to increase

are the also since the

ID in to in 2012, the SEC the

See note 2 citing to Rule 7Ad-22(b)( I) (Measurement and Management of Credit Risk Exposures) and Rule

7Ad-22(b)(2) (Margin Requirements). 6 See note 2, at page 42.

4

demonstrated above, Members have been given ample opportunity discuss proposal impact of this proposal and explore with NSCC staffpreparewith NSCC staff and

alternatives that could mitigate

Change NSCC Margin Requirements with Respect to ID TransactionsNeed

given that existing margin requirements have historically beenLetter argues impossibleClearing Fund,drawhavingprevent NSCCmore than adequate

inadequate (LEKcurrent margin requirementsNSCC believesunderstand page

obligatedfinancial markets, NSCCmaintaining stabilityGiven certain risk management practices, including with respect

margin requirement.management of credit exposures and with respect measurementadhere

recently standards applicableadopting particular with respectClearing Agency Standards,

clearing agencies’ credit risk exposures,measurement and management of potentialchange over time duerisks subject[clearing agencies]

not appropriatelyif those risksrisk profiles of participantssignificant changes accrual of significantresult[clearing agencies], theymeasured and managed

indicators of futureliabilities.” NSCC may not rely past events ofparticularlyprudentrisk management processes, nor woulddesigning

greater detail below, tradingdiscussedrecent financial market disruptions. greater frequencieshigher volumesincluding agency brokers, now trade

other technology that, while creating

market, may put these firms, including agency brokers, at aalgorithmic tradingutilizing methods such

accessibilityefficiencies protects itselfcontinuesNSCC must ensureof failing than they weregreater

of Members,default ofthat could result frommembership fromand financialtaking adequate margin that reflects the risk presented clearingsubmitting those transactionsofregardless oftransactions

Likelihood that Agency Brokers Could Fail

money result of unfavorableLetter states that “agency broker dealers make good on the losing trades” (LEKrely on their customersmarket moves because they

page support for this assertion.without providing

financial markets have under significantOffset was first introduced, changes, particularly with the implementation of Regulation NMS, decimal trading, and

of algorithmic trading and alternative trading systems, causing trading volumes market participants using high frequency tradingsignificantly. Agency brokers among

increased significantlyand volumes of institutional trades havetechnology, Offset. Particularly response the technology-related tradingofimplementation

increased risks of highAugust recognizeddisruption that occurred

1 I

frequency and high volume trading when it hosted a Technology and Trading Roundtable to discuss error prevention and error response as it relates to the trading technologies and infrastructure of the securities markets. It should be noted that th e events of last August originated at a firm that is an agency broker and clears a high volume of institutional trades at NSCC.

The LEK Letter also incorrectly states that, “[t]he ID System is used to send confirmations of buy and sell contracts to large institutional customers and the affirmation of the confirmation by the institutions constitutes a written acceptance by the institution that it is bound by the contract” (LEK Letter, page 2, emphasis added). In fact, institutional customers that are counteqarties to the institutional delivery side of ID trades cleared at NSCC are not Members of NSCC and have no contractual obligation with NSCC to complete those trades if the NSCC Member that is party to the transaction defaults. This lack of privity of contract between NSCC and the institutional counterparty to these trades creates the significant market risk that is being addressed by the proposal to remove the ID Offset that, in the event NSCC ceases to act for a Member with—

pending ID transactions, it will be unable to complete those pending ID transactions in the timeframe contemplated by its current Clearing Fund calculations and, as a result, without sufficient margin in its Clearing Fund, NSCC will be under collateralized.

The Filing sets out a number of reasons why NSCC may not be able to complete an insolvent Member’s open ID transactions, including the fact that the institutional customer is not a Member of NSCC, is not bound by NSCC’s Rules, and is not party to any legally binding contract with NSCC that requires the institutional customer or its custodian to complete the transaction. The proposal to remove the ID Offset is designed to ensure NSCC is not exposed to the market risk that is not currently covered by the margin collected on those trades.

4. Effects on Competition

The LEK Letter states that the “proposal will have a disproportionate negative impact on agency broker dealers that will likely force many of them out of business, thereby reducing competition in the securities business and securities markets” (LEK Letter, page 4).

By eliminating the ID Offset, NSCC is eliminating an unfair and disproportionate advantage currently enjoyed by those NSCC Members who clear the market side of ID trades at NSCC. NSCC’s Clearing Fund formula should calculate margin requirements that reflect the risks presented by the underlying transactions. The ID Offset currently operates to reduce the margin requirements for the market side of ID trades cleared at NSCC by inappropriately assuming that NSCC will be able to complete the pending ID transactions that were used to offset that Member’s unsettled NSCC position. Therefore, NSCC’s current Clearing Fund formula, through the application of the ID Offset, fails to take into account the significant risk that NSCC will not be able to complete those transactions, and would be left to liquidate a portfolio that is under collateralized.

As such, the proposal will “level the playing field” with respect to the calculation of Clearing Fund required deposits for the market side of ID trades cleared at NSCC, and will ensure NSCC

5

it to its to its

While NSCC the will the for those that the side ID at the the ID is applied

to the trade, to the type to The will

those

the any should be or

5.

The to the dire from the ID Letter, 5-6).

As in has its its the ID and the risks the to the and

its Members. has its and in to the the

to the the ID and to no

has to to for and the the

the Filing.

for its and its role in the The the the

in the to its and the the will the the U.S.

capital will to by the side ID are to we

the be as we all the the in filing.

do to me at

maintains compliance with regulatory obligations that require participants through a risk-based margin system.7

limit credit exposures

increase Clearing Fund requirementproposalrecognizes that OffsetNSCC,ofclear marketMembers removal oftrades

but only withtype of Member submitting theindiscriminately, without regard NSCC for clearing.respect of transaction being submitted proposal

ensure NSCC’s Clearing Fund formula more appropriately addresses the risks presented by transactions than the current Clearing Fund calculation. the important risk mitigationGiven benefits of unintended impact on competition of thisproposal, NSCC believes that

inappropriate.not considered unreasonableproposal

Explore Alternatives

reduce risk withoutLEK Letter states that NSCC “could implement other approaches pagesOffset” (LEKeliminatingconsequences that logically flow

mentioned earlier membershipcommunicated extensively withthis letter, NSCC clearing agencyconcerns with offset presentsOffset,about

provided particular those Members it expects proposal, including LEK Securities Corporation, with

membership,NSCC experience largest impact from

Offsetreview discussproposed impact of removingnumerous opportunities viable alternatives have been identifiedalternatives that could mitigate this impact. While

continued provide impacted Members withthese conversations, NSCCduring 18­prepare proposal, significantly throughmitigate the impact ofopportunities

month implementation timeframe outlined in

Conclusion

understanding of NSCC’s systemicallyconstructive inputNSCC thanks LEK importance ofimportant issues addressedforegoing illustratesindustry.

riskparticipants,Filing NSCC, securities markets NSCC serves. Given safety and soundness ofimprovemitigation benefits, adoption of the proposal

more fairly reflect the risks presentedmarkets, and NSCC’s Clearing Fund formula ofmarket it for clearing. Accordingly,NSCC submittedtrades that

of factorsbelieve it satisfiesapproved,Filingrespectfully request that approving a clearing agencyCommission must evaluate

contactnot hesitate (212) 855-7522.Should you have any questions, please

Sincerely,

Murray C. Pozmanter Managing Director

supra note 2, Rule I 7Ad-22(b)(2) (Margin Requirements).

6

c

Exhibit A

[Bracewell & Guiliani LLP Letter]

Exhibit B

[NSCC Response to Bracewell & Guiliani LLP Letter]