June 4, 2021
Hello, I support the changes as outlined in the summary, but there appear to be reductions in supplemental liquidity obligations which seem non-trivial and the ramifications should be considered. If minor changes to the rule-change could be incorporated without extending the implementation timeline, it might be for the best. Here are my observations:
When calculating the current Supplemental Liquidity Obligation, the Peak Liquidity Need is no longer used in the calculation. I wanted to flag this and make sure it is intended. It may encourage more risky behavior, as there would be less reason to avoid larger liquidity swings. Instead, the calculation could be similar to the existing rule but using a daily-calculated 24-month peak: Current Liquidity Obligation = (NSCC Current Liquidity Need) (Providers 24-mo. Peak Liquidity Need) / (Sum: 24 mo. Peak Liquidity Need for Each Provider)
The new calculation seems to find the value that would allow any one provider to fail, but would not allow enough liquidity for multiple providers to fail. The same \"total liquid resources of the NSCC\" is counted during the calculation of the liquidity needed from each provider. This would seem to be a major reduction in total liquidity required across all participants.
Assessing the supplemental liquidity need from options on the first day of the options period (the business day before the Saturday options expiration) is a two-day reduction from the two business days before the first day of the options period previously. This time reduction increases market risk, as if the required liquidity is not available, there is only a single day to respond.
Incorporating netting to reduce the providers projected supplemental liquidity obligation introduces additional risk. If shares are not received as expected, they can not be delivered as expected. Additional liquidity would be needed under these types of truly stressed market conditions, and would not be available based on the risk calculations. Netting should not be considered when calculating liquidity obligations.
Supplemental liquidity deposits would be returned the next business day, as opposed to seven days after the options expiration period ends, a difference of 8 days. There would be an additional risk, as the deposits could be returned before settlements are complete, potentially running into liquidity shortfalls.
Besides these aspects, I believe that real-time liquidity checks would be an absolute benefit, as it would bring more light to potentially risky operations which could otherwise be hidden between liquidity checks.