This page goes over the interactions between the security owners and the middlemen under typical conditions. The first paragraph touches on expanding central clearing at NSCC to
shorten clearing times with the SFTs.
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simultaneously agree to exchange the same securities and cash, plus or minus a rate payment, on future date. In particular, the proposed SFT Clearing Service would expand central clearing at
NSCC to include SFTs with a one Business Day term (ic., overnight SFTs) in eligible equity securities that are entered into by Members, institutional firms that are sponsored into NSCC by
Sponsoring Member (as defined below and in the proposed rule change), or Agent Clearing
Members (as defined below and in the proposed rule change) on behalf of Customers (as defined below and in the proposed rule change), as applicable.
'SFTs involve the owner of securities (typically a registered investment company, pension plan, sovercign wealth fund or other institutional firm) transferring those securities temporarily to a borrower (typically a hedge fund). SFTs are often facilitated and intermediated by broker- dealers and agent lenders custodial banks or other institutions that lend out securities as agent on behalf of institutional firms). In return for the lent securities, the borrower transfers collateral, and a net rate payment is typically transferred to either the lender or the borrower that reflects the liquidity of the lent securities, as well as interest on any cash collateral.? NSCC understands that SFTs provide liquidity to markets and facilitates the ability of market participants to make delivery on short-sales, and thereby avoid failures to deliver, "naked" shorts, and similar situations. On a typical Business Day, The Depository Trust Company
DTC"), an NSCC affiliate, processes deliver orders related to securities lending transactions on securities having a value of approximately $150 billion,
Capital Efficiency Opportunities
The Basel IP capital and leverage requirements, as implemented by the U.S. banking regulators, constrain the ability of agent lenders and brokers to intermediate and facilitate SFTs.*
NSCC believes central clearing of SFTs would be able to address these constraints, which may otherwise impair market participants' ability to engage in SFTs.
For example, NSC believes it is uniquely positioned to create balance sheet netting opportunities for market participants (i., the ability to offset cash payables and receivables
This rate payment is typically calculated in a manner similar to interest on the principal balance of a loan and accrues on a daily basis. As a result, the rate payment is typically calculated as the product of a specified balance (typically the amount of cash collateral unless the collateral consists of securities) and a specified rate (reflecting both the liquidity of the securities and the ability of the lender to re-use the cash collateral), divided by 360 or a similar day count fraction.
Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007 2009.
See, 12 C.F.R. Part 3 (Office of the Comptroller of the Currency Capital Adequacy
Standards); 12 C.F.R. Part 217 (Federal Reserve Capital Adequacy of Bank Holding
'Companies, Savings and Loan Holding Companies, and State Member Banks); 12 C.F.R.
Part 252, Subpart Q (Single Counterparty Credit Limits); 12 C.F.R. Part 324 (Federal
Deposit Insurance Corporation Capital Adequacy of FDIC-Supervised Institutions).