Euroclear Bank SA/NV; Order of the Commission Approving an Application To Modify an Existing Exemption From Clearing Agency Registration, 93994-94005 [2016-30853]

Download as PDF 93994 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices their affiliates having an ownership interest in a Member.74 Current Rule 2.10 provides that notwithstanding the affiliation prohibitions the rule does not prohibit a member or its affiliate from acquiring or holding an equity interest in BGM that is permitted by the ownership and voting limitations contained in the BGM Charter and the BGM Bylaws. In addition, Rule 2.10 states that it does not prohibit a member from being or becoming an affiliate of the Exchange, or an affiliate of any affiliate of the Exchange, solely by reason of such member or any officer, director, manager, managing member, partner or affiliate of such member being or becoming either (a) a director of the Exchange pursuant to the Bylaws of the Exchange, or (b) a director of the Exchange serving on the board of directors of BGM. The Exchanges propose to replace the references to BGM with CBOE Holdings to reflect that following the Closing, CBOE Holdings will replace BGM as the ultimate parent company of each Exchange.75 The Commission believes that these amendments are consistent with the Act as they are technical in nature. They do not alter any of the restrictions contained in Rule 2.10, rather the amendments merely update the rule text to reflect the new ownership of the Exchanges. sradovich on DSK3GMQ082PROD with NOTICES d. Bats Trading as Inbound Router The Edge Exchanges also proposed to amend Rule 2.12 in each of their rulebooks to replace a reference to BGM with ‘‘the holding company indirectly owning the Exchange and Bats Trading.’’ According to the Edge Exchanges, the rule is designed to ensure that Bats Trading, as inbound router for the Exchanges does not develop or implement changes to its systems on the basis of nonpublic information obtained as a result of its affiliation with the Exchanges until such information is available generally to similarly situation members of the Exchanges in connection with the provision of inbound order routing to one of the Exchanges.76 The proposed 74 See Notices, supra note 6, at 80107, 80099, 80152 and 80121. 75 The Exchanges also proposed to add the three CBOE Exchanges to the list of eligible Exchange affiliates to reflect that following the Closing, the CBOE Exchanges will be affiliates of the Exchanges. See proposed BZX, BYX, EDGA and EDGX Rule 2.10. In addition, the Edge Exchanges also proposed to remove references in Rule 2.10 to DE Route, as DE Route is no longer the routing broker-dealer for the Edge Exchanges. Bats Trading is now the Edge Exchanges’ routing broker-dealer. See proposed EDGA and EDGX Rule 2.10. 76 See Notices, supra note 6, at 80121 and 80152. VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 amendment does not alter the obligations Rule 2.12 imposes on the Edge Exchanges, but rather is a technical change to reflect the change in ownership of the Edge Exchanges. The proposed new rule language is consistent with the language used in Rule 2.12 in the Bats Exchanges’ rulebooks. As such, the Commission believes that this change is consistent with the Act. III. Conclusion For the foregoing reasons, the Commission finds that the proposed rule changes are consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange. It is therefore ordered, pursuant to Section 19(b)(2) of the Act 77 that the proposed rule changes (SR–BatsBZX– 2016–68; SR–BatsBYX–2016–29; SR– BatsEDGA–2016–24 and SR–BatsEDGX– 2016–60) are approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.78 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2016–30796 Filed 12–21–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79577; File No. 601–01] Euroclear Bank SA/NV; Order of the Commission Approving an Application To Modify an Existing Exemption From Clearing Agency Registration December 16, 2016 I. Introduction Euroclear Bank SA/NV (‘‘EB’’) filed with the Securities and Exchange Commission (‘‘Commission’’) on May 9, 2016, an application on Form CA–1 requesting to modify an existing exemption 1 from registration as a clearing agency (‘‘Modification 77 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 See Self-Regulatory Organizations; Morgan Guaranty Trust Company of New York, Brussels Office, as Operator of the Euroclear System; Order Approving Application for Exemption From Registration as a Clearing Agency, Exchange Act Release No. 39643 (Feb. 11, 1998), 63 FR 8232 (Feb. 18, 1998) (‘‘Original Exemption Order’’); and SelfRegulatory Organizations; Morgan Guaranty Trust Company, Brussels Office, as Operator of the Euroclear System and Euroclear Bank, S.A.; Order Approving Application to Modify an Existing Exemption From Clearing Agency Registration, Exchange Act Release No. 43775 (Dec. 28, 2000), 66 FR 819 (Jan. 4, 2001) (‘‘2001 Exemption Modification Order’’) (together the ‘‘Existing Exemption’’). 78 17 PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 Application’’) 2 pursuant to Section 17A 3 of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) and Rule 17Ab2–1 thereunder.4 Notice of EB’s Modification Application was published for comment in the Federal Register on September 6, 2016 (‘‘Modification Application Notice’’).5 The comment period closed on October 6, 2016, and the Commission received four comments, all of which were broadly supportive of the application.6 Subject to certain limitations and conditions, the Existing Exemption enables EB, as operator of the Euroclear System,7 to perform the functions of a clearing agency with respect to transactions involving certain U.S. government securities 8 for its U.S. participants 9 without registering as a 2 The descriptions set forth in this notice regarding the structure and operations of EB have been derived primarily from information contained in EB’s amended Form CA–1 application and publicly available sources. The redacted Modification Application and non-confidential exhibits thereto are available on the Commission’s Web site. 3 15 U.S.C. 78q–1. 4 17 CFR 240.17Ab2–1. 5 See Euroclear Bank SA/NV; Notice of Filing of Application To Modify an Existing Exemption From Clearing Agency Registration, Exchange Act Release No. 34–78710 (Aug. 29, 2016), 81 FR 61271 (Sept. 6, 2016). 6 See letters from Mark Jennis, Managing Director, DTCC (Sept. 13, 2016) (‘‘DTCC letter’’); Oscar A. Huettner, Managing Principal, LGM Financial Consulting LLC (Sept. 12, 2016) (‘‘LGM letter’’); Charles Cascarilla, Chief Executive Officer and CoFounder, Paxos (Oct. 6, 2016) (‘‘Paxos letter’’); Kyle Brandon, Managing Director, and Robert Toomey, Esq., Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (Oct. 6, 2016) (‘‘SIFMA letter’’). 7 ‘‘Euroclear System’’ means the securities settlement system that has been operated by EB or its predecessor since 1968 and the assets, means, and rights related to such services. All services performed by EB that relate to securities settlement and custody are part of the Euroclear System. See Modification Application, Exhibit S–1 at 1. 8 As used herein, the term ‘‘U.S. Government Securities’’ has the same meaning as the term ‘‘eligible U.S. government securities’’ used in the Existing Exemption, which consists of government securities described in Section 3(a)(42) of the Exchange Act, except that it does not include any (i) foreign-targeted U.S. government or agency securities or (ii) securities issued or guaranteed by the International Bank for Reconstruction and Development (i.e., the World Bank) or any other similar international organization, and that are (i) Fedwire-eligible U.S. government securities, (ii) mortgage-backed pass through securities that are guaranteed by the Government National Mortgage Association (‘‘GNMA’’), and (iii) any collateralized mortgage obligation whose underlying securities are Fedwire-eligible U.S. government securities or GNMA guaranteed mortgage-backed pass through securities and which are depository eligible securities. For reference purposes, Fedwire is a large-value transfer system operated by the Board of Governors of the Federal Reserve System that supports the electronic transfer of funds and of book-entry securities. See Original Exemption Order, supra note 1, at 8239. 9 As used herein, the term ‘‘U.S. Participant’’ refers to any Euroclear System participant having a E:\FR\FM\22DEN1.SGM 22DEN1 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices clearing agency (‘‘U.S. Government Securities Clearing Agency Activities’’).10 The Commission originally granted the Existing Exemption in 1998 to EB’s predecessor, Morgan Guaranty Trust Company of New York, Brussels Office (‘‘MGTBrussels’’), as operator of the Euroclear System (the Original Exemption Order).11 Under the Existing Exemption, EB may provide the U.S. Government Securities Clearing Agency Activities to U.S. Participants.12 In the Modification Application, EB has requested that the Commission broaden the Existing Exemption to permit EB to perform certain additional clearing agency services (such as certain central securities depository (‘‘CSD’’) services 13 and collateral management services) for equity securities issued by U.S. Issuers (‘‘U.S. Equity Securities’’) for its U.S. Participants to fulfill certain collateral obligations. The Modification Application specifies these additional clearing agency functions, referred to herein as the ‘‘U.S. Equities Clearing Agency Activities,’’ as follows: sradovich on DSK3GMQ082PROD with NOTICES (a) The provision of clearing agency services (such as certain CSD services and collateral management services) in relation to U.S. Participants’ use and reuse of U.S. Equity Securities issued by U.S. Issuers in support of collateral obligations utilizing the collateral management services provided by EB in relation to any securities or cash account held at EB that is used to receive collateral (‘‘Collateral Accounts’’) in connection with the services described in (b) below and in connection with receipt and delivery from other Euroclear System participants that are users of such collateral management services provided by EB; and (b) solely for the purpose of implementing the services described in (a) above, the provision of certain clearing agency services for U.S. Participants’ receipt and delivery of U.S. Equity Securities in relation to collateral U.S. residence, based upon the location of its executive office or principal place of business, including, without limitation, (i) a U.S. bank (as defined by Section 3(a)(6) of the Exchange Act), (ii) a foreign branch of a U.S. bank or U.S.-registered broker-dealer, and (iii) any broker-dealer registered as such with the Commission, even if such brokerdealer does not have a U.S. residence. 10 See Original Exemption Order, supra note 1, at 8232. 11 See supra note 1. Before EB replaced MGTBrussels as the operator of the Euroclear System, the Commission approved a modification to the Original Exemption Order to reflect the change in control of the Euroclear System from MGT-Brussels to EB. See 2001 Exemption Modification Order, supra note 1. 12 See Original Exemption Order, supra note 1, at 8239. 13 As used herein, the term ‘‘CSD services’’ has the meaning set forth in 17 CFR 240.17Ad–22(a)(3). See Exchange Act Release No. 34–78961 (Sept. 28, 2016), 81 FR 70786, 70901 (Oct. 13, 2016) (adopting final rules that, among other things, move the definition of ‘‘central securities depository services’’ from Rule 17Ad–22(a)(2) to (a)(3)). VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 93995 management services through accounts held at EB that are linked to EB’s account held at DTC.14 II. Summary of EB’s Organization, Current Activities, and the Modification Application EB’s clearing agency functions under the U.S. Equities Clearing Agency Activities will therefore entail only the movement of U.S. Equity Securities for collateral management purposes, as opposed to the relatively broader range of clearing agency functions permitted under the U.S. Government Securities Clearing Agency Activities. For example, the U.S. Government Securities Clearing Agency Activities include the settlement of purchase and sale transactions in U.S. Government Securities as well as the movement of U.S. Government Securities for collateral management purposes. To facilitate the movement of U.S. Equity Securities for collateral management purposes, Euroclear SA/ NV (‘‘ESA’’), the parent company of EB, and The Depository Trust and Clearing Corporation (‘‘DTCC’’) have entered into a joint venture known as DTCCEuroclear Global Collateral Ltd. (‘‘DEGCL’’). As further described in Part II.D, DEGCL would provide an inventory management service (‘‘JV– IMS’’) to facilitate, among other things, the repositioning and crediting of assets necessary to perform the U.S. Equities Clearing Agency Activities. EB has requested that it be permitted to provide the U.S. Equities Clearing Agency Activities without registering as a clearing agency and subject to the applicable conditions specified below. In addition, EB has requested that it be permitted to continue providing the U.S. Government Securities Clearing Agency Activities without registering as a clearing agency and under substantially the same conditions as those set forth in the Existing Exemption. After careful review of the comments received and the details and information provided in the Modification Application, the Commission concludes that it has sufficient information to decide whether the Modification Application should be approved. For the reasons discussed below, the Commission believes the Modification Application is consistent with the public interest, the protection of investors, and the purposes of Section 17A, and therefore grants EB’s request to modify the Existing Exemption, subject to the conditions and limitations described further below. A. Organization and Supervision EB is a limited liability company headquartered in Brussels, Belgium,15 organized under the laws of Belgium, and authorized in Belgium as a Belgian credit institution. EB is an international CSD and a global provider of clearance, settlement, collateral management, and related services. In particular, EB provides its participants with a means of acquiring, holding, transferring, and pledging security entitlements by electronic book-entry on its records outside of the U.S., either free-ofpayment or against payment, in multiple currencies.16 EB is part of a group of companies that serve as market infrastructures by offering clearing agency services to the domestic markets in Belgium, Netherlands, France, England, Ireland, Sweden, and Finland (collectively with EB, the ‘‘Euroclear Group’’).17 CSD entities in the Euroclear Group are subsidiaries of ESA, a Belgian limited liability company.18 Control and direction of the Euroclear Group strategic decisions are vested in ESA. ESA provides common services to EB and other affiliated companies of the Euroclear Group.19 ESA maintains intercompany agreements with EB that set forth respective services and obligations.20 As previously noted, all services performed by EB that relate to securities settlement and custody are part of the Euroclear System, which is designated as a securities settlement system under the Belgian Settlement Finality Act.21 According to EB, Belgian law provides for robust asset protection rights for assets deposited in the Euroclear System and for the protection of the holding of assets on the books of EB.22 EB further 14 See Modification Application, Exhibit S–1, at 40. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 15 EB also has a secondary office in Braine l’Alleund, Belgium, branch offices in Wanchai, Hong Kong and Krakow, Poland, and a representative office in New York City. See Modification Application, Exhibit I–1. 16 See Modification Application, Exhibit S–1 at 3. 17 In 2015, the Euroclear Group had assets under custody of Ö27.5 trillion, turnover equivalent to Ö674.7 trillion, and a settlement volume of 190.7 million netted transactions. Euroclear Group’s collateral management platform, the Collateral Highway, processed collateralized transactions in 2015 for an amount of Ö1.068 trillion on a daily basis. See Modification Application, Exhibit S–1 at 3. 18 See Modification Application, Exhibit A–2. 19 See Modification Application, Exhibit S–1 at 3. 20 Id. 21 See Modification Application, Exhibit K–5 at 22. 22 See Modification Application, Exhibit S–1 at 35. E:\FR\FM\22DEN1.SGM 22DEN1 93996 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices represents that Belgian law and EB’s arrangements provide a high degree of certainty with regards to finality of transfers on EB’s books, the holding of collateral in accounts, the contractual framework of participants in the Euroclear System, and default procedures.23 To utilize the Euroclear System, EB participants enter into a contractual relationship with EB to open and maintain securities and cash accounts at EB.24 EB participants agree that their rights to assets held in the Euroclear System are defined and governed by Belgian law.25 EB states that, under Belgian law, EB generally is the beneficiary of a statutory lien on assets in accounts held at EB to secure any claim it has against EB participants arising in connection with the clearance or the settlement of transactions through, or in connection with, the Euroclear System, including claims resulting from loans or advances.26 EB represents that it is subject to consolidated supervision by the National Bank of Belgium (‘‘NBB’’) and the Belgian Financial Services Market Authority (‘‘FSMA’’).27 EB also represents that NBB supervises ESA, due to its status as an authorized holding company of a regulated credit institution (i.e., EB) and as an institution assimilated to a securities settlement system (i.e., the Euroclear System).28 According to EB, the NBB exercises its supervision over EB and ESA on a consolidated basis.29 Specifically, the 23 See Modification Application, Exhibit S–1 at 35. 24 See Modification Application, Exhibit J. EB represents that EB participants’ rights in securities held in the Euroclear System are defined and governed by Belgian Royal Decree No. 62 dated Nov. 10, 1967 on the Deposit of Fungible Financial Instruments and the Settlement of Transactions involving such Instruments or similar Belgian legislation. EB states that the applicable Belgian law is effectively similar to securities entitlements under Revised Article 8 of the Uniform Commercial Code. See Modification Application, Exhibit S–1 at 36. 26 See Modification Application, Exhibit E–5 at 34. 27 See Modification Application, Exhibit S–1 at 20. 28 See Modification Application, Exhibit S–1 at 20. According to EB, pursuant to Article 20, § 2 of the Belgian Royal Decree of September 26, 2005, institutions assimilated to a settlement institution may not have shareholdings in commercial companies without the prior approval of the NBB, unless the shareholding is taken in companies whose activities consist, in whole or in part, in the activities that a settlement institution or an institution assimilated thereto may carry out. 29 Id. In addition, EB is submitted to the Regulation 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR) IV, and Regulation 909/2014 of 23 July 2014 on improving securities settlement in the European Union and on central securities depositaries (CSDR). See Modification Application, Exhibit K–5 at 16. sradovich on DSK3GMQ082PROD with NOTICES 25 Specifically, VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 NBB has prudential supervision and oversight over EB as a licensed credit institution operating in Belgium. Furthermore, the NBB supervises EB in its role as operator of the Euroclear System and as a recognized CSD. EB states that the NBB is required to ensure: (1) That EB’s clearance, settlement, and payment systems operate properly; (2) that those systems are efficient and sound; and (3) that EB meets the obligations applicable to credit institutions under applicable European law, as adopted into Belgian law.30 EB represents that the NBB has the authority to order EB to limit, suspend, or stop activities if EB does not comply with the regulatory requirements of its various authorizations.31 EB also states that the NBB assesses EB under the Principles for Financial Market Infrastructures (‘‘PFMI’’) and considers best practices where appropriate.32 EB further represents that the FSMA regulates EB for the purposes of compliance with investor protection rules and rules on the operation, integrity, and transparency of the Belgian financial markets.33 These include requirements relating to conflicts of interest with clients, customer protection in case of insolvencies, and enforcement of conduct requirements. B. Current Activities The Existing Exemption permits EB to provide the U.S. Government Securities Clearing Agency Activities to U.S. Participants.34 Under the terms of the Existing Exemption, the Commission places a limit on the volume of transactions in U.S. Government Securities conducted by U.S. Participants that can be settled through the Euroclear System. Specifically, the average daily volume of U.S. Government Securities settled through the Euroclear System for U.S. Participants may not exceed five percent of the total average daily dollar value of the aggregate volume in U.S. 30 See Modification Application, Exhibit S–1 at 20. 31 Id. 32 See Modification Application, Exhibit S–1 at 20. The PFMI are standards applicable to financial market infrastructures, such as CSDs and securities settlement systems. Committee on Payment and Settlement Systems (now the Committee on Payment and Market Infrastructure) and Technical Committee of the International Organization of Securities Commissions, Principles for financial market infrastructures (Apr. 16, 2012), available at https://www.bis.org/publ/cpss101a.pdf. 33 See Modification Application, Exhibit S–1 at 20–21. 34 See Original Exemption Order, supra note 1, at 8239. PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 Government Securities.35 To facilitate the monitoring of compliance with the volume limit and the impact of EB’s operations on the U.S. Government Securities market under the Existing Exemption, EB is required to provide the Commission with quarterly reports, calculated on a twelve-month rolling basis, of (i) the average daily volume of transactions in eligible U.S. Government Securities for U.S. Participants that are subject to the volume limit and (ii) the average daily volume of transactions in eligible U.S. Government Securities for all Euroclear System participants, whether or not subject to the volume limit.36 EB is also required to notify the Commission regarding material adverse changes in any account maintained in the Euroclear System for U.S. Participants.37 In addition, EB is required to respond to Commission requests for information regarding any U.S. Participant about whom the Commission has financial solvency concerns, including, for example, a settlement default by a U.S. Participant.38 The Commission also requires a satisfactory memorandum of understanding with the Belgian banking and securities regulator (currently the NBB) to facilitate the provision of information by EB to the Commission.39 EB participants are able to utilize various clearance and settlement services through the Euroclear System.40 Among those services are the EB collateral management services (‘‘EB–CMS’’), which provide a framework for exchanging collateral to fulfill bilateral obligations between counterparties.41 Parties to bilateral arrangements that require the posting of collateral by one party (‘‘Collateral Giver’’) in favor of the other party 35 See id. at 8239. Original Exemption Order, supra note 1, at 8240. EB’s non-U.S. participants are not subject to any restrictions under the Existing Exemption. 37 For purposes of the Original Exemption Order, the term ‘‘material adverse changes’’ included (i) the termination of any U.S. Participant; (ii) the liquidation of any securities collateral pledged by a U.S. Participant to secure an extension of credit made through the Euroclear System; (iii) the institution of any proceedings to have a U.S. Participant declared insolvent or bankrupt; or (iv) the disruption or failure in whole or in part in the operations of the Euroclear System either at its regular operating location or at its contingency center. See Original Exemption Order, supra note 1, at 8240, n.78. 38 See Original Exemption Order, supra note 1, at 8240. 39 See 2001 Exemption Modification Order, supra note 1, at 821; see also Understanding Regarding an Application of Euroclear Bank for an Exemption Under U.S. Federal Securities Laws (January 30, 2001) available at https://www.nbb.be/doc/cp/nl/ aboutcbfa/mou/pdf/mou_2001-01-30_ euroclearbank.pdf. 40 See Modification Application, Ex. J. 41 See Modification Application, Ex. S–1 at 3. 36 See E:\FR\FM\22DEN1.SGM 22DEN1 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices (‘‘Collateral Taker’’) may use the EB– CMS to secure credit exposures arising under such bilateral arrangements. The terms of such bilateral arrangements and related collateral needs (including the credit exposure, collateral requirements, and collateral terms) are negotiated and agreed between the parties independently of EB. After such arrangements are agreed, the parties then enter into an agreement with EB to provide the EB–CMS. EB states that its non-U.S. participants use the EB–CMS to meet collateral obligations with a variety of assets, including U.S. Government Securities and U.S. Equity Securities.42 EB also represents that U.S. Participants currently use the EB–CMS to meet collateral obligations with a wide variety of assets including U.S. Government Securities, but not including U.S. Equity Securities, as EB prohibits U.S. Participants from holding U.S. Equity Securities in an account at EB for any purpose as part of its contractual documentation with its participants, consistent with the terms of the Existing Exemption (‘‘Current Equities Restrictions’’).43 EB represents that automated systems protocols and control procedures are implemented in the Euroclear System to enforce the Current Equities Restrictions. The systems protocols consist of coded validation rules that are part of EB’s fully automated and standard processes that run prior to the settlement of any securities movement to or from an account held at EB.44 C. Modification Application EB has requested that the Commission broaden the Existing Exemption to allow it to provide the EB–CMS to its U.S. Participants using U.S. Equity Securities. Specifically, EB has requested that the Commission: (1) Continue the Existing Exemption under substantially similar conditions except as otherwise specified herein, (2) broaden the Existing Exemption to allow EB to provide the U.S. Equities Clearing Agency Activities under new conditions applicable to those activities, and (3) apply conditions to EB that are largely harmonized between the U.S. 42 See Modification Application, Exhibit S–1 at sradovich on DSK3GMQ082PROD with NOTICES 34. 43 Id. EB’s customer contracts provide that: ‘‘Due to restrictions imposed on Euroclear Bank by the United States Securities and Exchange Commission (S.E.C.) following SEC Rule 17Ab2–1, equities, ETFs and REITs issued by companies incorporated in a state or territory of the United States can be held in Euroclear Bank by non-US Participants only.’’ See Modification Application, Exhibit S–1 at 6. 44 See Modification Application, Exhibit S–1 at 34. VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 Government Securities Clearing Agency Activities and U.S. Equities Clearing Agency Activities (collectively, the ‘‘Clearing Agency Activities’’).45 Below the Commission discusses each of these requests in turn. First, EB has requested that the Commission continue the Existing Exemption to conduct the U.S. Government Securities Clearing Agency Activities without: (i) Requiring EB to register as a clearing agency with the Commission; (ii) changing the definition of the terms U.S. Government Securities or U.S. Participants, as set forth in the Existing Exemption; or (iii) changing the conditions set forth in the Existing Exemption with regards to the U.S. Government Securities Clearing Agency Activities, listed below: (a) Volume Limit. The average daily volume of transactions in eligible U.S. Government Securities for U.S. Participants processed through EB as operator of the Euroclear System may not exceed five percent of the total average daily dollar value of the aggregate volume in eligible U.S. Government Securities. (b) Commission Access to Information regarding U.S. Government Securities Clearing Agency Activities. EB will continue to provide the Commission with quarterly reports, calculated on a twelve-month rolling basis, of (a) the average daily volume of transactions in eligible U.S. Government Securities for U.S. Participants that are subject to the volume limit as described in Section IV.C.2 of the Original Exemption Order and (b) the average daily volume of transactions in eligible government securities for all Euroclear System participants, whether or not subject to the volume limit as described in Section IV.C.2 of the Original Exemption Order.46 Second, EB has requested that the following conditions of the Existing Exemption with regards to the U.S. Government Securities Clearing Agency Activities be replaced and superseded: (a) The obligations in Section IV.C.3 of the Original Exemption Order to provide disclosure documents to the Commission; (b) the obligations in Section IV.C.3 of the Original Exemption Order to file with the Commission amendments to its application for exemption on Form CA–1; and (c) the obligations in Section IV.C.3 of the Original Exemption Order to notify the Commission regarding material adverse changes in any account maintained by Euroclear for its U.S. Participants and to respond to a Commission request for information about any U.S. Participant about 45 In harmonizing the conditions between the Clearing Agency Activities, new operational risk conditions, set forth in Part IV.C, and certain additional other conditions, set forth in Part IV.D, would also apply to the U.S. Government Securities Clearing Agency Activities. 46 See Modification Application, Exhibit S–1 at 39. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 93997 whom the Commission has financial solvency concerns.47 The conditions set forth in Part IV.D would replace the above and include, among other things, substantially similar obligations to the above. Third, EB has requested that the Commission permit EB to provide, without registering as a clearing agency with the Commission, the U.S. Equities Clearing Agency Activities, subject to certain conditions. As described in the Modification Application, EB’s provision of U.S. Equities Clearing Agency Activities would entail activities such as custody and safekeeping,48 settlement,49 and asset servicing 50 on behalf of U.S. Participants with respect to U.S. Equity Securities. For example, EB would maintain securities accounts on its books,51 provide safekeeping of and recordkeeping for those securities accounts,52 settle instructions by participants,53 and provide recordkeeping and reporting in real time on the status of settlement to participants.54 EB also would process corporate actions as part of its asset servicing business for any U.S. Equity Securities that remain in EB’s account held at DTC on the record date.55 The EB–CMS would be offered to U.S. Participants in support of their obligations under security-based swap transactions, securities lending transactions, and repurchase agreements, among other transactions.56 The EB–CMS would independently verify that the collateral proposed and provided by the Collateral Giver meets the terms reported by the counterparties for the duration of the collateral obligation.57 EB would do this by calculating the exchange of value necessary to meet the collateral obligation information entered in by the users of the EB–CMS, including by making value determinations, such as marking to market the value of the 47 See id. Modification Application, Exhibit S–1 at 4. 49 See Modification Application, Exhibit S–1 at 5. 50 See Modification Application, Exhibit S–1 at J–3. 51 See Modification Application, Exhibit S–1 at 2. 52 See Modification Application, Exhibit K–5 at 80–81. 53 See Modification Application, Exhibit K–5 at 76, 83. 54 See Modification Application, Exhibit K–5 at 76. 55 See Modification Application, Exhibit J–3. 56 See, e.g., Modification Application, Exhibit P–2 (describing necessary revisions to its Operating Procedures related to collateral services, derivatives services, loan services, repurchase services, and securities lending services arising out of the proposed U.S. Equities Clearing Agency Activities). 57 See Modification Application, Exhibit J–3. 48 See E:\FR\FM\22DEN1.SGM 22DEN1 93998 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices collateral based on reference data.58 Also, EB would generate instructions and communicate the instructions to EB’s settlement processing infrastructure to transfer collateral among the Collateral Accounts.59 Under the Existing Exemption, EB may already offer the EB–CMS for U.S. Government Securities to U.S. Participants, but EB may only offer the EB–CMS for U.S. Equity Securities to its non-U.S. participants, because non-U.S. participants are not covered by the scope of the Existing Exemption. sradovich on DSK3GMQ082PROD with NOTICES D. Collateral Regulations and Related Infrastructure According to the Modification Application, new and enhanced regulatory requirements (‘‘New Collateral Regulations’’) are leading counterparties to derivative and financing transactions to seek streamlined margin processing and increased efficiency in the availability and deployment of collateral.60 These New Collateral Regulations are expected to be implemented in the European Union in the near future.61 EB states that the regulatory changes include new restrictions on eligible collateral, requiring the use of highly liquid assets, prescribed haircuts, and segregation requirements, as well as a prohibition on rehypothecation for initial margin. EB believes that, when fully implemented, the New Collateral Regulations will result in increased capital requirements, mandatory central clearing of more derivative transactions, and new margining rules for bilateral trades, which will increase demand for high quality collateral. EB projects that the requirement for more transactions and exposures to be collateralized globally will result in a significant increase in the number of required 58 See Modification Application, Exhibit K–5 at 60 (referencing obtaining the market value of a security. The EB–CMS system does not apply any further haircuts or adjustments once the market value is obtained from third party data providers); see also Euroclear plc, Risk Management at Euroclear: Including Pillar 3 Disclosure 2012— Euroclear plc, at 43 (2012) (‘‘Securities for which Euroclear Bank does not obtain external quotations regularly can also be valued according to the price associated with securities transactions in the Euroclear system, or according to theoretical models.’’), available at https://www.euroclear.com/ dam/Brochures/Pillar3_2012.pdf. 59 See Modification Application, Exhibit J–3. 60 See Modification Application, Exhibit S–1 at 6. 61 Id.; see also Peter Madigan, EU non-cleared margin regime set to take effect in January 2017, Risk.net (Sept. 27, 2016) (regarding the adoption and implementation of the draft Regulatory Technical Standards on risk mitigation techniques for non-centrally cleared OTC derivatives), available at https://www.risk.net/risk-magazine/ news/2472246/eu-non-cleared-margin-regime-setto-take-effect-in-january-2017. VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 collateral movements between market participants, which will have implications for counterparty credit risk, funding and capital charges, and reputational and operational risk. EB also represents that these regulatory changes include requirements for initial margin for counterparties to certain derivative and financing transactions, as well as a reduction or removal of unsecured thresholds for variation margin. EB expects that these new initial margin requirements will significantly increase the amount of collateral required to support a number of derivative and financing transactions. In addition, EB represents that it is expected that the removal or reduction of unsecured thresholds for variation margin will mean any changes in underlying transaction valuations may trigger increased margin calls, requiring market participants to hold additional collateral available for posting. EB represents that the New Collateral Regulations therefore are expected to greatly increase the complexity of collateral management and create new competition for collateral.62 Industry research cited by EB indicates that as these regulatory changes take effect, the volume of required collateral movements will increase and the number of collateral settlement fails and associated costs are likely to rise proportionally.63 EB has requested to broaden its exempt clearing agency activities for the purpose of assisting its participants’ compliance with these regulations, which, as stated earlier, are scheduled to take effect in the near future and which will significantly affect the use of collateral. In connection with its request, EB has taken preparatory measures to create the infrastructure necessary to accommodate the U.S. Equities Clearing 62 EB states that collateral movements will need to be tracked and applied against a growing number and type of credit support documentation, while segregation rules will multiply the number of collateral accounts needed and correspondingly increase the complexity of accurately processing collateral movements across account types, fragmented central clearing, and collateral delivery channels. See Modification Application, Exhibit S– 1 at 7; see also Implications of Collateral Settlement Fails: An Industry Perspective on Bilateral OTC Derivatives (Feb. 2016), available at https:// www.imas.org.sg/uploads/media/2016/03/03/1046_ Implications_of_Collateral_Settlement__FINAL.pdf (‘‘Implications of Collateral Settlement Fails’’); Collateral Management in Europe: Searching for Central Intelligence (May 2015), available at https:// www.euroclear.com/dam/Brochures/EuroclearCollateral-Management-Aite-Paper.pdf; The Economics of Collateral (Dec. 2013), available at https://dtcc.com/∼/media/Files/Downloads/ WhitePapers/LSE%20Report.ashx. 63 See, e.g., Implications of Collateral Settlement Fails, supra note 61, at 5. PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 Agency Activities, including the formation in 2014 of DEGCL, the joint venture between Euroclear and DTCC. DEGCL describes itself as an open architecture infrastructure designed to streamline collateral processing globally, providing solutions for both over-the-counter derivatives and financing that deliver transparency, collateral mobility, efficiency, and security through its utility offerings.64 DEGCL is authorized as a service company by the Financial Conduct Authority (‘‘FCA’’) in the United Kingdom.65 EB represents that DEGCL seeks to provide services to its users, including buy-side and sell-side financial institutions, in meeting their risk management and regulatory requirements for the holding and exchange of collateral as required by the New Collateral Regulations.66 These services will be offered to users located primarily in Europe and the U.S.67 With respect to the U.S. Equities Clearing Agency Activities, DEGCL will facilitate a U.S. Participant’s repositioning of assets in U.S. Participant-held accounts at The Depository Trust Company (‘‘DTC’’) for use in the U.S. Participant’s corresponding Collateral Account at EB in the EB–CMS. In particular, these activities will be provided by the JV– IMS, a DEGCL service offering that, according to DEGCL, will automate certain collateral management tasks, reposition inventory across settlement locations in the U.S. and Europe, and thereby make collateral more readily available.68 EB represents that the JV– IMS would provide an automated mechanism for an entity that is both a participant of EB and DTC (‘‘JV–IMS User’’) 69 to receive recommendations on how to reposition assets in the JV– IMS User’s account held at DTC, including U.S. Equity Securities, for subsequent crediting of those assets to its Collateral Accounts within the EB– CMS (and for the return of such assets to the JV–IMS User’s account held at DTC). To facilitate the JV–IMS, EB will become a participant at DTC, subject to 64 See ‘‘State street to pilot GlobalCollateral ltd’s margin settlement messaging service,’’ DEGCL Press Release (July 11, 2016), available at https:// www.globalcollateral.net/press5-statestreet.html. 65 DEGCL’s reference number as an authorized service company is 686269. See FCA Financial Services Register, available at https:// www.fca.org.uk/register. 66 See Modification Application, Exhibit S–1 at 7. 67 See id. 68 See Modification Application, Exhibit S–1 at 8; ‘‘State street to pilot GlobalCollateral ltd’s margin settlement messaging service,’’ DEGCL Press Release (July 11, 2016), available at: https:// www.globalcollateral.net/press5-statestreet.html. 69 See id. E:\FR\FM\22DEN1.SGM 22DEN1 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices sradovich on DSK3GMQ082PROD with NOTICES approval by DTC, its standard membership requirements and certain heightened requirements for a non-U.S. entity.70 To initially establish its sub-account held at DTC for the JV–IMS prior to its initial use, a JV–IMS User will set parameters that specify which types of assets in its account held at DTC (and in what amounts) it will make available for the JV–IMS, including any limits or criteria on those assets (such as ratings).71 The JV–IMS User will then transfer assets that meet the parameters to a sub-account held at DTC that is designated for, and dedicated to, the JV– IMS. The JV–IMS will then monitor that information and independently verify that the assets identified by the JV–IMS User meet its own parameters, as well as the EB eligibility requirements (such as an accepted CUSIP number). If so, the JV–IMS will prepare and submit to EB free-of-payment delivery instructions (which EB will in turn submit to DTC on the JV–IMS User’s behalf) to transfer the assets identified by the JV–IMS User in its designated sub-account held at DTC to EB’s account held at DTC.72 The JV–IMS will also prepare and submit instructions to EB to credit such transferred assets from EB’s account held at DTC to the relevant JV–IMS User’s Collateral Accounts. Additionally, the JV–IMS would facilitate the automated return of such assets to the JV–IMS User’s account held at DTC when necessary to meet other settlement obligations and for corporate actions by preparing and submitting to EB (for eventual forwarding by EB to DTC) free-of-payment delivery instructions to transfer such assets from EB’s account held at DTC to the relevant JV–IMS User’s sub-account held at DTC. Finally, the JV–IMS would report to the JV–IMS User all settlement instructions generated via the JV–IMS, the status of the generated settlement instructions, and other relevant information in regards to such settlement instructions. All of the foregoing would be subject to the DTC rules regarding a link with EB that was approved by the Commission in July 2016.73 70 EB has signed a DTC Participant’s Agreement pursuant to which it agreed that the DTC rules shall be a part of the terms and conditions of every contract or transaction that EB may make or have with DTC. See id.; see also DTC Policy Statements on the Admissions of Participants (June 2013). 71 See Modification Application, Exhibit S–1 at 8. 72 This process is subject to DTC rules governing EB’s role in repositioning assets. See SelfRegulatory Organizations; The Depository Trust Company; Order Approving Proposed Rule Change to Establish a Link with Euroclear, Exchange Act Release No. 78358 (July 19, 2016), 81 FR 48482 (July 25, 2016) (‘‘DTC EB Link Rule’’). 73 See id. VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 After the JV–IMS User’s assets are credited to EB’s account held at DTC via the JV–IMS processes described above, the assets would then be credited to the Collateral Accounts for the relevant EB participant.74 As stated above, with respect to the U.S. Equities Clearing Agency Activities, EB’s internal protocols would structure these Collateral Accounts to allow U.S. Participants to: (1) Take receipt of U.S. Equity Securities credited to the account via the JV–IMS process described immediately above; (2) deliver U.S. Equity Securities out of the Collateral Accounts for mobilization as collateral through the EB–CMS infrastructure and to receive U.S. Equity Securities into the Collateral Accounts mobilized from other participants of the EB–CMS; and (3) deliver U.S. Equity Securities back to the relevant JV–IMS User’s sub-account at DTC. EB represents that these transfer and use restrictions on Collateral Accounts would prevent a U.S. Participant’s U.S. Equity Securities held in Collateral Accounts from being used for any other purposes in the Euroclear System, such as normal settlement activity, except under certain circumstances involving the default of a Collateral Giver.75 Currently, non-U.S. JV–IMS Users may move U.S. Equity Securities from DTC to EB by transferring the securities to an account held at DTC for EB’s custodian. Approving the Modification Application would expand the options available to non-U.S. participants, such that non-U.S. JV–IMS Users holding U.S. Equity Securities at DTC could also transfer U.S. Equity Securities to EB’s DTC account. If a user of the EB–CMS defaults, either a Collateral Taker or a Collateral Giver can notify EB of a default under their bilateral transaction. EB’s operations staff would then initiate a process to override the regular controls that govern use of U.S. Equity Securities as collateral and would instruct DTC to debit those securities from EB’s DTC Account and to credit them to the account held at DTC for EB’s custodian, while still being credited to the non-defaulting party’s account at EB.76 In the Modification Application, EB has proposed to amend the Current 74 All settlement activity related to the JV–IMS that occurs on the books of DTC is governed exclusively by DTC procedures. All activity related to the use of assets that occurs on the books of EB is governed exclusively by the EB contractual framework. See Modification Application, Exhibit S–1 at 9. 75 See Modification Application, Exhibit S–1 at 11. 76 Id. PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 93999 Equities Restrictions77 to permit the use by U.S. Participants of U.S. Equity Securities subject to the transfer and use restrictions described above. In all other circumstances, the Current Equities Restrictions would otherwise remain applicable. III. Discussion A. Statutory Standards Section 17A of the Exchange Act directs the Commission to facilitate the establishment of (i) a national system for the prompt and accurate clearance and settlement of securities transactions and (ii) linked or coordinated facilities for clearance and settlement of securities transactions.78 In facilitating the establishment of the national clearance and settlement system, the Commission must have due regard for the public interest, the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition among brokers and dealers, clearing agencies, and transfer agents.79 Section 17A(b)(1) of the Exchange Act requires all clearing agencies to register with the Commission.80 It also states that, upon the Commission’s motion or upon a clearing agency’s application, the Commission may conditionally or unconditionally exempt a clearing agency from any provision of Section 17A of the Exchange Act or the rules or regulations thereunder if the Commission finds that such exemption is consistent with the public interest, the protection of investors, and the purposes of Section 17A, including the prompt and accurate clearance and settlement of securities and funds.81 The Commission notes that it has previously found an exemption from clearing agency registration under Section 17A(b)(1) to be an appropriate response in instances where an entity has engaged in a limited scope of clearing agency activity.82 B. Comments Received The Commission received four comment letters in response to the Modification Application Notice.83 Commenters included U.S. market participants and an industry representative. Among the commenters was DTCC, which is the holding company for three clearing agencies registered with the Commission and co77 See supra Part II.B. 15 U.S.C. 78q–1(a)(2). 79 See 15 U.S.C. 78q–1(a)(2)(A). 80 See 15 U.S.C. 78q–1(b); 17 CFR 240.17Ab2–1. 81 See 15 U.S.C. 78q–1(b)(1). 82 See Modification Application Notice, supra note 5, at 61277. 83 See supra note 6. 78 See E:\FR\FM\22DEN1.SGM 22DEN1 94000 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices owner of DEGCL. All of the commenters expressed support for the Modification Application. Each of the commenters stated that the proposed broadening of EB’s exempted clearing agency activity would benefit U.S. market participants. One commenter stated that the Modification Application would provide U.S. market participants with more options to meet collateral and liquidity demands by providing access to an expanded pool of high quality collateral.84 The commenter further explained that the use of U.S. Equity Securities as collateral by non-U.S. participants is common in the European Union, and the Modification Application would help provide a level playing field between U.S. Participants and non-U.S. participants in the types of U.S. securities that can be offered as collateral in the EB–CMS.85 Another commenter noted that the U.S. Equities Clearing Agency Activities would enable U.S. market participants to optimize their management of U.S. Equity Securities inventory by effectively and efficiently addressing collateral management needs in other markets and time zones.86 Several commenters also stated that expanding the scope of activity under the Existing Exemption to include U.S. Equity Securities would result in lower costs for U.S. market participants and more efficient capital management.87 Each of the commenters also stated that the U.S. Equities Clearing Agency Activities would reduce risk. One commenter stated that the Modification Application would reduce systemic risk by supporting more efficient allocation of collateral, thus reducing transaction costs and the risk of settlement failures.88 Another commenter stated that the effective management of collateral inventory on a real-time basis, as described in the Modification Application, would reduce operational sradovich on DSK3GMQ082PROD with NOTICES 84 See SIFMA letter at 2 (also noting that the Modification Application would improve asset mobility for U.S. banks and broker-dealers engaging in securities financing transactions); see also LGM letter at 1 (stating that U.S. institutions would significantly benefit from being allowed to use U.S. Equity Securities as collateral in the international environment). 85 See SIFMA letter at 2. 86 See Paxos letter at 2–3; see also DTCC letter at 3 (stating that the Modification Application would provide U.S participants with the ability to optimize collateral globally). 87 See SIFMA letter at 2; DTCC letter at 3; Paxos letter at 3; 88 See SIFMA letter at 3; see also DTCC letter at 3 (stating that the JV–IMS will reduce systemic risk by supporting the more efficient allocation of collateral, reducing transaction costs and the risk of settlement failures.). VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 risk and increase efficiency.89 A third commenter stated that allowing U.S. Participants to use U.S. Equity Securities in the EB–CMS would reduce settlement and liquidity risks across the broader securities markets.90 In addition, the commenters more generally endorsed the Modification Application based on EB’s reputation as a market infrastructure provider.91 One commenter explained that EB provides its participants with an efficient means of acquiring, holding, transferring, and pledging security entitlements by electronic book entry on its records outside the U.S., either free of or versus payment, in multiple currencies.92 Commenters also noted more generally that EB is well-known and wellregulated,93 and that it operates in a manner consistent with the PFMI.94 Finally, one commenter expressed views regarding the specific terms and conditions in the Modification Application Notice. The commenter expressed a favorable view of the Modification Application, stating that, given the limited scope of the modification request, and in light of the increased transparency that would result from the additional monitoring, reporting, and other conditions proposed by EB in the Modification Application, the Commission should consider EB compliant with applicable regulatory standards.95 The commenter also requested that the Commission use the proposed reporting conditions to monitor the growth of the U.S. Equities Clearing Agency Activities rather than establish a fixed volume limit at this time, noting that the proposed reporting conditions would provide the Commission with greater transparency and broader visibility into cross-border collateral management.96 In addition, the commenter stated that it did not see other providers being disadvantaged by an expansion of EB’s exempted activity.97 C. Evaluation of the Modification Application With respect to the U.S. Government Securities Clearing Agency Activities, the Modification Application does not propose to make any material changes to the U.S. Government Securities Clearing 89 See Paxos letter at 2. LGM letter at 1. 91 See DTCC letter at 3; Paxos letter at 1; SIFMA letter at 3. 92 See Paxos letter at 1. 93 See LGM letter at 2–3. 94 See DTCC letter at 3; Paxos letter at 1; SIFMA letter at 3. 95 See Paxos letter at 1–2. 96 See id. 97 See id. 90 See PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 Agency Activities, and therefore the Commission is not reconsidering the appropriateness of an exemption for those activities in this order. In addition, EB has represented in the Modification Application that it continues to meet the standards previously applied when the Commission approved the Existing Exemption,98 and for the purposes of its consideration of the Modification Application, the Commission is taking those representations into account.99 With respect to the U.S. Equities Clearing Agency Activities, the Commission believes that, while such activities reflect an expansion of the range of securities for which EB may perform clearing agency functions relative to the Existing Exemption, those additional clearing agency functions would remain limited because EB would necessarily rely on its link with DTC to perform them. For example, the Modification Application requests only that EB be permitted to settle collateral movements involving U.S. Equity Securities and that the settlement of those collateral movements occur through the use of dedicated accounts at EB and DTC structured so that a U.S. Participant can only: (i) Receive U.S. Equity Securities in these accounts; (ii) deliver U.S. Equity Securities out of these accounts for mobilization as collateral in the EB infrastructure; and (iii) deliver U.S. Equity Securities back to the relevant user’s account at DTC.100 The Modification Application does not request that EB be permitted to provide the full range of CSD and securities settlement activities for the purchase or sale of such securities. Finally, the Commission believes that the terms and conditions of the exemption set forth in this order would, as noted by one of the commenters,101 assist the Commission in evaluating and monitoring the U.S. Equities Clearing Agency Activities on an ongoing basis to assess, among other considerations, how such limited 98 See Modification Application, Exhibit S–1 at 13. 99 The Commission also notes that it has no basis to believe that EB has not operated within and otherwise performed in accordance with the terms and conditions of the Existing Exemption. 100 See Modification Application, Exhibit S–1, at 9–10. 101 See Paxos letter at 3 (responding to a request for comment in the Modification Application Notice regarding whether the Commission should include among the conditions for the U.S. Equities Clearing Agency Activities a volume limit similar to the volume limit under the Existing Exemption that applies to the U.S. Government Securities Clearing Agency Activities and stating that a fixed volume limit should not be added as a condition). The Commission does not believe that such a condition is necessary and has declined to include it. E:\FR\FM\22DEN1.SGM 22DEN1 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices sradovich on DSK3GMQ082PROD with NOTICES activity interacts with other aspects of the national clearance and settlement system and whether the exemption and its conditions remain appropriate. Accordingly, the Commission believes that an exemption subject to the terms and conditions set forth herein, rather than full registration as a clearing agency, continues to be the appropriate regulatory status for EB. Below, the Commission evaluates EB’s request for an exemption from registration as a clearing agency for the U.S. Equities Clearing Agency Activities under Section 17A(b)(1) of the Exchange Act, including whether the Modification Application is consistent with the public interest, the protection of investors, and the purposes of Section 17A of the Exchange Act. The Commission also describes the specific conditions that will be imposed in connection with the approval of EB’s request for an exemption and explains its rationale for such conditions. 1. Facilitating the Establishment of Linked or Coordinated Facilities for the Settlement of Transactions Congress found that the linking of settlement facilities and the development of uniform standards and procedures for settlement will reduce unnecessary costs and increase the protection of investors, and directed the Commission to use its authority to facilitate the establishment of linked or coordinated facilities for settlement of transactions in securities.102 As previously described, EB will perform the U.S. Equities Clearing Agency Activities using settlement facilities linked between DTC, a clearing agency registered with the Commission, and EB.103 For the reasons discussed in the Modification Application Notice and as discussed further below, the Commission believes that links and coordination between these two settlement providers will foster the establishment of uniform standards and procedures, which in turn may result in benefits to participants of both DTC and EB resulting from such standardization. Commenters generally agreed that the proposed link between EB and DTC would provide benefits to U.S. market participants. One commenter explained that the U.S. Equities Clearing Agency Activities could help U.S. market participants optimize the management of their U.S. Equity Securities inventory by efficiently addressing management needs in other markets and time zones.104 Another commenter stated that adding the ability to reposition equity assets held at DTC for transactions on the books at EB would provide common participants of DTC and EB with the ability to optimize collateral globally, reduce costs, and manage their balance sheets in a capital efficient manner.105 The Commission agrees that the greater coordination among settlement providers in performing the U.S. Equities Clearing Agency Activities is consistent with the public interest because it could facilitate improved asset mobilization generally, benefiting U.S. market participants. 2. Safeguarding Securities and Funds Related to the Settlement of Securities Transactions Congress found that the safeguarding of securities and funds related to the settlement of securities transactions is necessary for the protection of investors, and directed the Commission to have due regard for the safeguarding of securities and funds in the use of its authority under Section 17A of the Exchange Act.106 Accordingly, the Commission has reviewed EB’s representations with respect to its rules, procedures, and controls on the rights of securities issuers and holders; the creation of securities positions within client accounts; the regular review of such procedures and controls by EB’s internal audit department and external auditor; the enterprise risk management framework EB operates under; and the role that DTC will play as a depository for U.S. Equity Securities. As discussed in the Modification Application Notice, the Commission has adopted rules under Section 17A of the Exchange Act that, among other things, help facilitate the safeguarding of funds and securities by registered clearing agencies.107 For example, the Commission’s rules require certain registered clearing agencies to have policies and procedures to, among other things, immobilize or dematerialize securities certificates and transfer them by book entry to the greatest extent possible; eliminate principal risk by linking securities transfers to funds transfers; identify sources of operational risk and minimize them through the development of appropriate systems, controls and procedures; and have Paxos letter at 2. DTCC letter at 3. 106 See 15 U.S.C. 78q–1(a)(1)(A), (2)(A). 107 See 12 CFR 240.17Ad–22(d); 12 CFR 242.1000 et seq.; see also 12 CFR 240.17Ad–22(e) (adopted subsequent to publication of the Modification Application Notice with a compliance date of April 11, 2017). 105 See 102 See 15 U.S.C. 78q–1(a)(1)(D), (a)(2)(A)(ii). Self-Regulatory Organizations; The Depository Trust Company; Order Approving Proposed Rule Change to Establish a Link with Euroclear, Exchange Act Release No. 34–78358 (July 19, 2016), 81 FR 48482 (July 25, 2016). 103 See VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 business continuity plans that allow for timely recovery of operations and fulfillment of a clearing agency’s obligations.108 The Commission has also noted that registered clearing agencies develop and maintain plans to assure the safeguarding of securities and funds; the integrity of automated data processing systems; the recovery of securities, funds, or data under a variety of loss or destruction scenarios; and have business continuity plans that allow for the timely recovery of operations and the fulfillment of a registered clearing agency’s obligations.109 EB has rules and procedures in place to ensure that the creation of securities positions is only performed upon receipt of securities to be credited to client accounts, and that removal of these securities positions is processed without manual intervention and upon final maturity or in accordance with a corporate event. Additionally, EB represents that it reports movements in client accounts to clients on a daily basis, and that it regularly reviews its procedures and controls.110 EB’s risk mitigation practices and internal controls are also subject to regulatory oversight by the NBB. The Commission notes that commenters also viewed favorably EB’s ability to safeguard securities and funds, stating that EB is a well-known and well-regulated market infrastructure provider that operates under internationally developed standards,111 and that EB has a 40-plusyear record of efficiently managing settlements and custody across numerous markets.112 Finally, the conditions set forth below will allow the Commission to examine EB and monitor the U.S. Equities Clearing Agency Activities so that the Commission can assess any impact the activities may have on U.S. market participants and the U.S. securities markets. In this respect, the Commission believes that EB’s operations are consistent with the Commission’s current regulatory approach to the safeguarding of securities and funds related to the settlement of securities transactions, and consistent with the protection of investors, because the transfer of securities will take place via book entry at EB. As described in the Modification 108 See 12 CFR 240.17Ad–22(d)(4), (10), and (13). Exchange Act Release No. 34–68080 (Oct. 22, 2012), 77 FR 66219, 66268 (Nov. 2, 2012). 110 Part of this review includes an International Standard on Assurance Engagements 3402 report, which, pursuant to the conditions set forth in Part IV.C, will be provided to the Commission on an annual basis. 111 See DTC letter at 3; SIFMA letter at 3. 112 See LGM letter at 1. 109 See 104 See PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 94001 E:\FR\FM\22DEN1.SGM 22DEN1 94002 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices Application Notice, the Commission has previously stated its belief that the immobilization and dematerialization of securities and their transfer by book entry results in reduced costs and risks associated with securities settlements and custody by removing the need to hold and transfer many, if not most, physical certificates.113 Accordingly, the Commission believes that approval of the Modification Application would be consistent with the public interest and the protection of investors generally, and specifically, the safeguarding of securities and funds under EB’s provision of the U.S. Equities Clearing Agency Activities. sradovich on DSK3GMQ082PROD with NOTICES 3. Prompt and Accurate Settlement of Securities Transactions Congress found that the prompt and accurate clearance and settlement of securities transactions is necessary for the protection of investors and that inefficient procedures for settlement imposed unnecessary costs on investors.114 For the reasons discussed in the Modification Application Notice and as discussed further below, the Commission believes that approval of the Modification Application would promote the prompt and accurate clearance and settlement of securities transactions and the protection of investors because EB’s settlement process is consistent with prior Commission observations regarding delivery versus payment (‘‘DVP’’) systems. The Commission has previously stated that DVP reduces the risk that a party would lose some or its entire principal because payment is made only if securities are delivered.115 The Commission also believes that a DVP method reduces the potential that delivery of the security is not appropriately matched with payment for a security. Therefore, the Commission believes the use of a DVP method promotes the clearing agency’s ability to facilitate prompt and accurate clearance and settlement.116 One commenter addressed how EB eliminates the principal risk described above in noting that EB currently provides its participants with an efficient means of acquiring, holding, transferring, and pledging security entitlements by electronic book entry on its records outside the U.S., either free of or versus payment, in multiple currencies.117 The Commission notes that the EB system 113 See Exchange Act Release No. 34–68080 (Oct. 22, 2012), 77 FR 66219, 66253 (Nov. 2, 2012). 114 See 15 U.S.C. 78q–1(a)(1)(A), (B). 115 See 77 FR at 66256. 116 See id. 117 See Paxos letter at 1. VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 has controls in place requiring the availability of the cash and securities before executing instructions (i.e., positioning), preventing settlement of the transaction if the cash and/or the securities are not available.118 These rules and controls help address the principal risk inherent in settling linked obligations. Multiple commenters noted the potential gains in efficiency to be had by U.S. Participants if EB were to expand its current services to include U.S. Equity Securities. One commenter cited EB’s real-time management of collateral inventory as being integral to reducing operational risk and increasing efficiencies,119 while another cited positively EB’s ability to facilitate the efficient deployment of collateral at a time where new regulatory regimes significantly increase the demand for high-grade assets.120 The Commission believes that EB’s operations, as represented to the Commission, are conducted in a manner that is consistent with the promptness and accuracy requirements under Section 17A of the Exchange Act. This will enable the efficient transfer of assets, which helps protect investors and provides benefits to U.S. market participants. 4. Maintenance of Fair Competition Among Market Participants The Commission is directed to have due regard for the maintenance of fair competition in the use of its authority under Section 17A of the Exchange Act.121 One commenter stated that the Modification Application would provide a level playing field between U.S. Participants and non-U.S. participants in the types of U.S. securities they can offer as collateral in the EB–CMS, noting that the use of U.S. Equity Securities as collateral within the EB–CMS is already common among EB’s non-U.S. participants in the European Union.122 Another commenter stated that it did not foresee other providers of collateral management services to be disadvantaged by approval of EB’s Modification Application; rather, the commenter expected the Modification Application to be beneficial by expanding the options that participants and their clients have for addressing 118 In addition, EB represents that the Euroclear System is a delivery-versus-payment system, which settles instructions between clients with finality of the transfer of securities from the seller to the buyer occurring at the same time as the finality of transfer of funds from the buyer to the seller. 119 See Paxos letter at 2. 120 See SIFMA letter at 2. 121 See 15 U.S.C. 78q–1(a)(2)(A). 122 See SIFMA Letter at 2. PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 collateral demands.123 The Commission notes that approval will reduce the disparity between U.S. Participant and non-U.S. participant utilization of the EB–CMS, but the Commission does not believe EB’s proposal will have a direct impact on the current competitive landscape for the provision of settlement of transactions in U.S. Equity Securities for U.S. market participants more generally because Euroclear will not provide settlement for purchase and sale transactions in U.S. Equity Securities. Accordingly, the Commission believes that the Modification Application is consistent with Section 17A of the Exchange Act because it should facilitate fair competition between U.S. Participants and non-U.S. participants, consistent with the public interest, and would not prevent U.S. market participants from using other comparable services that may be (or become) available. IV. Terms and Conditions of Exemption This order grants EB an exemption from registration as a clearing agency under Section 17A of the Exchange Act to perform the Clearing Agency Activities described above. The exemption is granted subject to the conditions set forth below, which the Commission believes are necessary and appropriate in light of the statutory requirements of Section 17A. The Commission is including specific conditions to this exemption designed to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of securities transactions and the establishment of linked and coordinated facilities for the clearance and settlement of securities transactions. In the Modification Application, the Commission discussed the origin and purpose of each of these conditions.124 The conditions are designed to promote coordination, the safeguarding of securities and funds, and fair competition among market participants. The conditions replace and supersede all conditions set forth in the Existing Exemption. A. Continuation of Conditions Applicable to the U.S. Government Securities Clearing Agency Activities (1) The average daily volume of eligible U.S. Government Securities processed for U.S. Participants through EB as operator of the Euroclear System may not exceed five percent of the total average daily dollar value of the 123 See Paxos Letter at 3. Modification Application Notice, supra note 5, at 61280–81. 124 See E:\FR\FM\22DEN1.SGM 22DEN1 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices aggregate volume in eligible U.S. Government Securities. (2) EB will provide the Commission with quarterly reports, calculated on a twelve-month rolling basis, of: (a) The average daily volume of transactions in eligible U.S. Government Securities for U.S. Participants that are subject to the volume limit; and (b) the average daily volume of transactions in eligible U.S. Government Securities for all Euroclear System participants. B. Condition Applicable to the U.S. Equities Clearing Agency Activities EB shall provide to the Commission quarterly reports, calculated on a twelve-month rolling basis, of: (1) The average daily value of U.S. Equity Securities that are held in Collateral Accounts at EB for U.S. Participants and a break-down of the general types of EB collateral agreements in respect of which such value is given as collateral; (2) the average daily value of U.S. Equity Securities that are held in EB’s account at DTC relating to inventory management services; and (3) the total value, and a break-down of the general types of EB collateral agreements in respect of which such value is given as collateral, of U.S. Equity Securities that are transferred from Collateral Accounts of U.S. Participants at EB to other Securities Clearance Accounts at EB (other than IMS-Linked Accounts) pursuant to a liquidation of such collateral. C. Operational Risk Conditions Applicable to the Clearing Agency Activities sradovich on DSK3GMQ082PROD with NOTICES (1) Prior to commencing the U.S. Equities Clearing Agency Activities,125 EB shall demonstrate to the Commission that EB maintains written policies and procedures applicable to those systems that support or are integrally related to the Clearing Agency Activities (the ‘‘Systems’’) that, on an ongoing basis, are reasonably designed to: (a) Establish a robust operational riskmanagement framework applicable to the Systems with appropriate systems, policies, procedures, and controls to identify, monitor, and manage operational risks; 125 In the Modification Application Notice, this condition stated: ‘‘EB shall demonstrate to the Commission or its designee prior to commencing the U.S. Equities Clearing Agency Activities that EB maintains written policies and procedures applicable to those systems that support or are integrally related to the Clearing Agency Activities (the ‘‘Systems’’) that, on an ongoing basis, are reasonably designed to.’’ The Commission has modified this condition to improve clarity. In addition, here and below the Commission has removed references to ‘‘or its designee’’ because the reference is not necessary. VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 (b) Clearly define the roles and responsibilities of EB personnel for addressing operational risk (e.g., identify a senior manager responsible for compliance with the operational conditions applicable to the Systems); (c) Review operational policies, procedures, and controls applicable to the Systems; (d) Audit the Systems, and test the Systems periodically and at implementation of significant changes; (e) Clearly define operational reliability objectives for the Systems; (f) Ensure that the Systems have scalable capacity adequate to handle increasing stress volumes and achieve the Systems service-level objectives; (g) Establish comprehensive physical and information security policies that address all potential vulnerabilities and threats to the Systems; (h) Establish a business continuity plan for the Systems that addresses events posing a significant risk of disrupting the Systems’ operations, including events that could cause a wide-scale or major disruption in the provision of the Clearing Agency Activities; (i) Incorporate the use of a secondary site in EB’s business continuity plan that is designed to ensure that the Systems can resume operations within two hours following disruptive events; and (j) Regularly test or otherwise validate EB’s business continuity plans; and identify, monitor, and manage the risks that key participants, other financial market infrastructures, and service and utility providers might pose to the Systems’ operations in relation to the Clearing Agency Activities. (2) For purposes of condition C.1, such policies and procedures shall be consistent with current information technology industry standards, which shall be comprised of information technology practices that are widely available to information technology professionals in the financial sector and issued by a widely recognized organization. EB shall inform the Commission of the information technology industry standards that EB has chosen to use, affirm that choice on an annual basis, and provide advance notice of the use of different standards as soon as practicable. (3) EB shall provide the Commission with an annual update on the status of the items set forth in condition C.1. (4) EB shall establish, implement, maintain, and enforce written policies and procedures reasonably designed to ensure that the Systems operate on an ongoing basis in a manner that complies with the conditions applicable to the PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 94003 Systems and with EB’s rules and governing documents applicable to the Clearing Agency Activities. (5)(a) Upon EB having a reasonable basis to conclude that a disruption, compliance issue, or intrusion of the Systems that impacts, or is reasonably likely to impact, the Clearing Agency Activities has occurred (a ‘‘Systems Event’’), EB shall: (i) Take appropriate corrective action, which shall include, at a minimum, devoting adequate resources to remedy the Systems Event as soon as reasonably practical; (ii) Notify the Commission of such Systems Event within 24 hours after occurrence; (iii) Until such time as a Systems Event is resolved and EB’s investigation of the Systems Event is closed, provide updates pertaining to such Systems Event to the Commission on a regular basis; (iv) Within 48 hours after the occurrence of a Systems Event or where EB reasonably determines that such deadline cannot be met and so notifies the Commission, promptly thereafter, submit an interim written notification pertaining to such Systems Event to the Commission containing: (A) A detailed description of: The relevant discovery and duration times, detection, root cause, and remedial actions taken or planned regarding the Systems Event (to the extent known at report time); EB’s assessment of the entities (including types of market participants) and EB services affected by the Systems Event; EB’s assessment of the impact of the Systems Event on the Participants; and any other pertinent information known by the EB about the Systems Event; and (B) a copy of any information disseminated to EB’s U.S. Participants in accordance with EB’s notification practices regarding the Systems Event; (v) Within ten business days after the occurrence of a Systems Event, or where EB reasonably determines that such deadline cannot be met and so notifies the Commission, promptly thereafter, submit a written final report regarding the matters covered in the interim report required under (iv) above to the Commission; and (vi) For Systems Events characterized as ‘‘Bronze level’’ events (i.e., a Systems Event in which the incident is clearly understood, almost immediately under control, involves only one business unit and/or entity, and is resolved within a few hours), in lieu of the reporting in (i) through (v) above, provide on a quarterly basis an aggregated list of Bronze level events. (b) As used herein: (i) A ‘‘disruption’’ means an event in the Systems that E:\FR\FM\22DEN1.SGM 22DEN1 sradovich on DSK3GMQ082PROD with NOTICES 94004 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices disrupts, or significantly degrades, the normal operation of the Systems in relation to the Clearing Agency Activities; (ii) a ‘‘compliance issue’’ means an event at EB that has caused any System to operate in a manner that does not comply with the applicable conditions or EB’s rules and governing documents applicable to the Clearing Agency Activities; and (iii) an ‘‘intrusion’’ means any unauthorized entry into the Systems in relation to the Clearing Agency Activities. (6) EB shall, within 30 calendar days after the end of each quarter, submit to the Commission a report describing completed, ongoing, and planned material changes to the Systems that support or are related to the Clearing Agency Activities during the prior, current, and subsequent calendar quarters, including the dates or expected dates of commencement and completion. EB shall establish reasonable written criteria for identifying a change to the Systems as material and report such changes in accordance with such criteria. (7) EB shall provide the Commission with: (a) Annually, the audited control report made available to EB’s Participants prepared in accordance with internationally accepted standards for assurance reports on controls at a service organization (such as the International Standard on Assurance Engagements (ISAE) Standard No. 3402); (b) annually, copies of those portions of any annual control report provided by EB to its primary Belgian regulator that describes controls applicable to the Systems as used to support or in relation to the Clearing Agency Activities; and (c) copies of agendas, reports and presentation materials relating to the capacity, integrity, resiliency, availability, and security or compliance of the Systems that are provided by EB or its primary Belgian regulator to any committee of regulators that implements the memorandum of understanding among regulators of Euroclear Group’s CSD entities that provides for the coordinated and common oversight and supervision of the Euroclear Group. (8) EB shall make, keep, and preserve at least one copy of all documents relating to its compliance with the operational risk conditions; keep all such documents for a period of not less than five years, the first two years in an easily accessible place (which may be located in the European Union); and upon request of the Commission, promptly furnish to the possession of the Commission copies of any such documents. VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 D. Additional Conditions Applicable to the Clearing Agency Activities (1) EB shall provide to the Commission its annual audited financial statements prepared by competent independent audit personnel. (2) EB shall notify the Commission of any material changes to any service agreement between EB and any other entity that is performing Clearing Agency Activities on behalf of EB if such changes are reasonably expected to materially affect the Clearing Agency Activities. (3) EB will notify the Commission (a) promptly following termination of any U.S. Participant as a participant in the Euroclear System, (b) promptly following the liquidation by EB of any securities collateral pledged by a U.S. Participant to EB to secure an extension of credit made through the Euroclear System, and (c) promptly following EB becoming aware of the institution of any proceedings to have a U.S. Participant declared insolvent or bankrupt, and will respond to Commission requests for information about any U.S. Participant about whom the Commission has financial solvency concerns, including, for example, a settlement default by a U.S. Participant. (4) EB shall annually provide to the Commission a report describing: (a) Material changes to the representations made by EB in support of the approval of this Order that would not otherwise require amendment of EB’s application for exemption on Form CA–1 in accordance with these conditions; (b) the functioning of EB’s policies and procedures for monitoring its own compliance with the conditions of this order regarding the Clearing Agency Activities (and the compliance of any affiliated or third-party service provider referred to in condition D.2); and (c) the management by EB of any conflicts of interest of such affiliated or third-party service provider that EB becomes aware have arisen since the prior report with respect to the performance of the Clearing Agency Activities. (5) EB shall keep records relating to the Clearing Agency Activities regarding settlement details, account details, service agreements, and service notices sent to U.S. Participants pertaining to the operation of the Clearing Agency Activities, retain such records for a period of not less than five years, the first two years in an easily accessible place (which may be located in the European Union), and upon request of any representative of the Commission promptly furnish, or require its service PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 providers to furnish, copies thereof to the possession of such representative.126 (6) EB shall respond to and require its service providers to respond to a request from the Commission for additional information relating to the Clearing Agency Activities and provide access to the Commission to conduct on-site inspections of all facilities (including automated systems and systems environment), records, and personnel related to the Clearing Agency Activities. The request for information shall be made and the inspections shall be conducted solely for the purpose of reviewing the Clearing Agency Activities’ operations and compliance with the federal securities laws and the terms and conditions in any order exempting EB from registration as a clearing agency with regard to the Clearing Agency Activities. (7) EB shall file with the Commission amendments to its application for exemption on Form CA–1 if it makes any material change to the Clearing Agency Activities or any change materially affecting the Clearing Agency Activities as summarized in the relevant exemption order, EB’s amended Form CA–1 or in any subsequently filed amendments to its Form CA–1 that would make such previously provided information incomplete or inaccurate. E. Modifications to Exemption EB is required to file with the Commission amendments to its application for exemption on Form CA– 1 if it makes any material change affecting the Clearing Agency Activities—as summarized in this order, in its application on Form CA–1 dated May 9, 2016, or in any subsequently filed amendments to its application on Form CA–1—that would make such previously provided information incomplete or inaccurate. In addition, the Commission may modify by order the terms, scope, or conditions of EB’s exemption from registration as a clearing agency if it determines that such modification is necessary or appropriate in the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. Furthermore, the Commission may limit, suspend, or revoke this exemption if it finds that EB has violated or is unable to comply with any of the provisions set forth in this order if such action is necessary or appropriate in the public interest, for 126 The Commission has modified this condition to clarify that, upon request of any representative of the Commission, EB shall promptly furnish, or require its service providers to promptly furnish, copies of the records described in the condition to the possession of such representative. E:\FR\FM\22DEN1.SGM 22DEN1 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. V. Conclusion The Commission believes that the Modification Application demonstrates that EB will have sufficient operational capabilities to facilitate prompt and accurate collateral management services and to support the establishment of linked and coordinated facilities for the settlement of obligations under its collateral management services in support of securities transactions. The Commission also notes that EB’s exemption will be subject to conditions that are designed to enable the Commission to monitor EB’s operational capacity and safeguards, corporate structure, and ability to operate in a manner to further the purposes of Section 17A of the Exchange Act. Further, the conditions include a robust set of reporting requirements that will allow the Commission to monitor the growth and development of EB’s exempted clearing agency activities so that the Commission will be well positioned to evaluate whether and when any modifications to the terms and conditions set forth above are necessary. Therefore, for the reasons discussed throughout this order, the Commission finds that the Modification Application is consistent with the public interest, the protection of investors, and the purposes of Section 17A of the Exchange Act. It is hereby ordered, pursuant to Section 17A(b)(1) of the Exchange Act, that the application for a modification of EB’s exemption from registration as a clearing agency under Section 17A(b)(1) of the Exchange Act filed by EB on May 9, 2016 (File No. 601–01) be, and hereby is, approved within the scope described in this order and subject to the terms and conditions contained in this order. By the Commission. Brent J. Fields, Secretary. [FR Doc. 2016–30853 Filed 12–21–16; 8:45 am] BILLING CODE 8011–01–P SMALL BUSINESS ADMINISTRATION for the Commonwealth of MASSACHUSETTS dated 12/14/2016. Incident: Ten Alarm Fire. Incident Period: 12/03/2016. Effective Date: 12/14/2016. Physical Loan Application Deadline Date: 02/13/2017. Economic Injury (EIDL) Loan Application Deadline Date: 09/14/2017. Dated: December 14, 2016. Maria Contreras-Sweet, Administrator. Submit completed loan applications to: U.S. Small Business Administration, Processing And Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. Seacoast Capital Partners IV, L.P.; Notice Seeking Exemption Under Section 312 of the Small Business Investment Act, Conflicts of Interest ADDRESSES: out Credit Available Elsewhere ..................................... For Economic Injury: Businesses and Small Agricultural Cooperatives Without Credit Available Elsewhere ... Non-Profit Organizations Without Credit Available Elsewhere ..................................... 2.500 sradovich on DSK3GMQ082PROD with NOTICES Jkt 241001 PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 December 13, 2016. Mark L. Walsh, Associate Administrator for Investment. [FR Doc. 2016–30872 Filed 12–21–16; 8:45 am] BILLING CODE P 2.500 SMALL BUSINESS ADMINISTRATION (Catalog of Federal Domestic Assistance Number 59008) 19:00 Dec 21, 2016 [License No. 01/01–0434] 3.125 This is a notice of an Administrative declaration of a disaster VerDate Sep<11>2014 SMALL BUSINESS ADMINISTRATION Notice is hereby given that Seacoast Capital Partners IV, L.P., 555 Ferncroft Road, Danvers, MA 01923, a Federal Licensee under the Small Business Investment Act of 1958, as amended (‘‘the Act’’), in connection with the financing of a small concern, has sought SUPPLEMENTARY INFORMATION: Notice is an exemption under Section 312 of the hereby given that as a result of the Act and Section 107.730, Financings Administrator’s disaster declaration, which Constitute Conflicts of Interest of applications for disaster loans may be filed at the address listed above or other the Small Business Administration (‘‘SBA’’) Rules and Regulations (13 CFR locally announced locations. 107.730). Seacoast Capital Partners IV, The following areas have been L.P., proposes to provide debt/equity determined to be adversely affected by security financing to Northwest the disaster: Cascade, Inc., 10412 John Bananola Way Primary Counties: Middlesex. E, Puyallup, WA 98374 (‘‘NWC’’). Contiguous Counties: The financing is brought within the purview of § 107.730(a)(1) of the Massachusetts: Essex, Norfolk, Regulations because Seacoast Capital Suffolk, Worcester. Partners III, L.P. an Associate of New Hampshire: Hillsborough. Seacoast Capital Partners IV, L.P., owns The Interest Rates are: more than five percent of NWC, and will receive proceeds from this transaction, Percent and therefore this transaction is considered a financing of an Associate For Physical Damage: requiring prior SBA approval. Homeowners With Credit AvailNotice is hereby given that any able Elsewhere ...................... 3.000 interested person may submit written Homeowners Without Credit Available Elsewhere .............. 1.500 comments on the transaction, within Businesses With Credit Availfifteen days of the date of this able Elsewhere ...................... 6.250 publication, to the Associate Businesses Without Credit Administrator for Investment, U.S. Available Elsewhere .............. 3.125 Small Business Administration, 409 Non-Profit Organizations With Third Street SW., Washington, DC Credit Available Elsewhere ... 2.500 20416. Non-Profit Organizations With- AGENCY: SUMMARY: BILLING CODE 8025–01–P A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW., Suite 6050, Washington, DC 20416. The number assigned to this disaster for physical damage is 15009 5 and for economic injury is 15010 0. The States which received an EIDL Declaration # are Massachusetts, New Hampshire. U.S. Small Business Administration. ACTION: Notice. [FR Doc. 2016–30878 Filed 12–21–16; 8:45 am] FOR FURTHER INFORMATION CONTACT: [Disaster Declaration #15009 and #15010] Massachusetts Disaster #MA–00069 94005 [Disaster Declaration #15007 and #15008] Alabama Disaster #AL–00078 U.S. Small Business Administration. ACTION: Notice. AGENCY: This is a notice of an Administrative declaration of a disaster SUMMARY: E:\FR\FM\22DEN1.SGM 22DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 246 (Thursday, December 22, 2016)]
[Notices]
[Pages 93994-94005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30853]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79577; File No. 601-01]

Euroclear Bank SA/NV; Order of the Commission Approving an
Application To Modify an Existing Exemption From Clearing Agency
Registration

December 16, 2016

I. Introduction

Euroclear Bank SA/NV (``EB'') filed with the Securities and
Exchange Commission (``Commission'') on May 9, 2016, an application on
Form CA-1 requesting to modify an existing exemption \1\ from
registration as a clearing agency (``Modification Application'') \2\
pursuant to Section 17A \3\ of the Securities Exchange Act of 1934
(``Exchange Act'') and Rule 17Ab2-1 thereunder.\4\ Notice of EB's
Modification Application was published for comment in the Federal
Register on September 6, 2016 (``Modification Application Notice'').\5\
The comment period closed on October 6, 2016, and the Commission
received four comments, all of which were broadly supportive of the
application.\6\
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\1\ See Self-Regulatory Organizations; Morgan Guaranty Trust
Company of New York, Brussels Office, as Operator of the Euroclear
System; Order Approving Application for Exemption From Registration
as a Clearing Agency, Exchange Act Release No. 39643 (Feb. 11,
1998), 63 FR 8232 (Feb. 18, 1998) (``Original Exemption Order'');
and Self-Regulatory Organizations; Morgan Guaranty Trust Company,
Brussels Office, as Operator of the Euroclear System and Euroclear
Bank, S.A.; Order Approving Application to Modify an Existing
Exemption From Clearing Agency Registration, Exchange Act Release
No. 43775 (Dec. 28, 2000), 66 FR 819 (Jan. 4, 2001) (``2001
Exemption Modification Order'') (together the ``Existing
Exemption'').
\2\ The descriptions set forth in this notice regarding the
structure and operations of EB have been derived primarily from
information contained in EB's amended Form CA-1 application and
publicly available sources. The redacted Modification Application
and non-confidential exhibits thereto are available on the
Commission's Web site.
\3\ 15 U.S.C. 78q-1.
\4\ 17 CFR 240.17Ab2-1.
\5\ See Euroclear Bank SA/NV; Notice of Filing of Application To
Modify an Existing Exemption From Clearing Agency Registration,
Exchange Act Release No. 34-78710 (Aug. 29, 2016), 81 FR 61271
(Sept. 6, 2016).
\6\ See letters from Mark Jennis, Managing Director, DTCC (Sept.
13, 2016) (``DTCC letter''); Oscar A. Huettner, Managing Principal,
LGM Financial Consulting LLC (Sept. 12, 2016) (``LGM letter'');
Charles Cascarilla, Chief Executive Officer and Co-Founder, Paxos
(Oct. 6, 2016) (``Paxos letter''); Kyle Brandon, Managing Director,
and Robert Toomey, Esq., Managing Director and Associate General
Counsel, Securities Industry and Financial Markets Association (Oct.
6, 2016) (``SIFMA letter'').
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Subject to certain limitations and conditions, the Existing
Exemption enables EB, as operator of the Euroclear System,\7\ to
perform the functions of a clearing agency with respect to transactions
involving certain U.S. government securities \8\ for its U.S.
participants \9\ without registering as a

[[Page 93995]]

clearing agency (``U.S. Government Securities Clearing Agency
Activities'').\10\ The Commission originally granted the Existing
Exemption in 1998 to EB's predecessor, Morgan Guaranty Trust Company of
New York, Brussels Office (``MGT-Brussels''), as operator of the
Euroclear System (the Original Exemption Order).\11\ Under the Existing
Exemption, EB may provide the U.S. Government Securities Clearing
Agency Activities to U.S. Participants.\12\
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\7\ ``Euroclear System'' means the securities settlement system
that has been operated by EB or its predecessor since 1968 and the
assets, means, and rights related to such services. All services
performed by EB that relate to securities settlement and custody are
part of the Euroclear System. See Modification Application, Exhibit
S-1 at 1.
\8\ As used herein, the term ``U.S. Government Securities'' has
the same meaning as the term ``eligible U.S. government securities''
used in the Existing Exemption, which consists of government
securities described in Section 3(a)(42) of the Exchange Act, except
that it does not include any (i) foreign-targeted U.S. government or
agency securities or (ii) securities issued or guaranteed by the
International Bank for Reconstruction and Development (i.e., the
World Bank) or any other similar international organization, and
that are (i) Fedwire-eligible U.S. government securities, (ii)
mortgage-backed pass through securities that are guaranteed by the
Government National Mortgage Association (``GNMA''), and (iii) any
collateralized mortgage obligation whose underlying securities are
Fedwire-eligible U.S. government securities or GNMA guaranteed
mortgage-backed pass through securities and which are depository
eligible securities. For reference purposes, Fedwire is a large-
value transfer system operated by the Board of Governors of the
Federal Reserve System that supports the electronic transfer of
funds and of book-entry securities. See Original Exemption Order,
supra note 1, at 8239.
\9\ As used herein, the term ``U.S. Participant'' refers to any
Euroclear System participant having a U.S. residence, based upon the
location of its executive office or principal place of business,
including, without limitation, (i) a U.S. bank (as defined by
Section 3(a)(6) of the Exchange Act), (ii) a foreign branch of a
U.S. bank or U.S.-registered broker-dealer, and (iii) any broker-
dealer registered as such with the Commission, even if such broker-
dealer does not have a U.S. residence.
\10\ See Original Exemption Order, supra note 1, at 8232.
\11\ See supra note 1. Before EB replaced MGT-Brussels as the
operator of the Euroclear System, the Commission approved a
modification to the Original Exemption Order to reflect the change
in control of the Euroclear System from MGT-Brussels to EB. See 2001
Exemption Modification Order, supra note 1.
\12\ See Original Exemption Order, supra note 1, at 8239.
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In the Modification Application, EB has requested that the
Commission broaden the Existing Exemption to permit EB to perform
certain additional clearing agency services (such as certain central
securities depository (``CSD'') services \13\ and collateral management
services) for equity securities issued by U.S. Issuers (``U.S. Equity
Securities'') for its U.S. Participants to fulfill certain collateral
obligations. The Modification Application specifies these additional
clearing agency functions, referred to herein as the ``U.S. Equities
Clearing Agency Activities,'' as follows:
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\13\ As used herein, the term ``CSD services'' has the meaning
set forth in 17 CFR 240.17Ad-22(a)(3). See Exchange Act Release No.
34-78961 (Sept. 28, 2016), 81 FR 70786, 70901 (Oct. 13, 2016)
(adopting final rules that, among other things, move the definition
of ``central securities depository services'' from Rule 17Ad-
22(a)(2) to (a)(3)).

(a) The provision of clearing agency services (such as certain
CSD services and collateral management services) in relation to U.S.
Participants' use and reuse of U.S. Equity Securities issued by U.S.
Issuers in support of collateral obligations utilizing the
collateral management services provided by EB in relation to any
securities or cash account held at EB that is used to receive
collateral (``Collateral Accounts'') in connection with the services
described in (b) below and in connection with receipt and delivery
from other Euroclear System participants that are users of such
collateral management services provided by EB; and
(b) solely for the purpose of implementing the services
described in (a) above, the provision of certain clearing agency
services for U.S. Participants' receipt and delivery of U.S. Equity
Securities in relation to collateral management services through
accounts held at EB that are linked to EB's account held at DTC.\14\
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\14\ See Modification Application, Exhibit S-1, at 40.

EB's clearing agency functions under the U.S. Equities Clearing Agency
Activities will therefore entail only the movement of U.S. Equity
Securities for collateral management purposes, as opposed to the
relatively broader range of clearing agency functions permitted under
the U.S. Government Securities Clearing Agency Activities. For example,
the U.S. Government Securities Clearing Agency Activities include the
settlement of purchase and sale transactions in U.S. Government
Securities as well as the movement of U.S. Government Securities for
collateral management purposes.
To facilitate the movement of U.S. Equity Securities for collateral
management purposes, Euroclear SA/NV (``ESA''), the parent company of
EB, and The Depository Trust and Clearing Corporation (``DTCC'') have
entered into a joint venture known as DTCC-Euroclear Global Collateral
Ltd. (``DEGCL''). As further described in Part II.D, DEGCL would
provide an inventory management service (``JV-IMS'') to facilitate,
among other things, the repositioning and crediting of assets necessary
to perform the U.S. Equities Clearing Agency Activities.
EB has requested that it be permitted to provide the U.S. Equities
Clearing Agency Activities without registering as a clearing agency and
subject to the applicable conditions specified below. In addition, EB
has requested that it be permitted to continue providing the U.S.
Government Securities Clearing Agency Activities without registering as
a clearing agency and under substantially the same conditions as those
set forth in the Existing Exemption. After careful review of the
comments received and the details and information provided in the
Modification Application, the Commission concludes that it has
sufficient information to decide whether the Modification Application
should be approved. For the reasons discussed below, the Commission
believes the Modification Application is consistent with the public
interest, the protection of investors, and the purposes of Section 17A,
and therefore grants EB's request to modify the Existing Exemption,
subject to the conditions and limitations described further below.

II. Summary of EB's Organization, Current Activities, and the
Modification Application

A. Organization and Supervision

EB is a limited liability company headquartered in Brussels,
Belgium,\15\ organized under the laws of Belgium, and authorized in
Belgium as a Belgian credit institution. EB is an international CSD and
a global provider of clearance, settlement, collateral management, and
related services. In particular, EB provides its participants with a
means of acquiring, holding, transferring, and pledging security
entitlements by electronic book-entry on its records outside of the
U.S., either free-of-payment or against payment, in multiple
currencies.\16\
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\15\ EB also has a secondary office in Braine l'Alleund,
Belgium, branch offices in Wanchai, Hong Kong and Krakow, Poland,
and a representative office in New York City. See Modification
Application, Exhibit I-1.
\16\ See Modification Application, Exhibit S-1 at 3.
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EB is part of a group of companies that serve as market
infrastructures by offering clearing agency services to the domestic
markets in Belgium, Netherlands, France, England, Ireland, Sweden, and
Finland (collectively with EB, the ``Euroclear Group'').\17\ CSD
entities in the Euroclear Group are subsidiaries of ESA, a Belgian
limited liability company.\18\ Control and direction of the Euroclear
Group strategic decisions are vested in ESA. ESA provides common
services to EB and other affiliated companies of the Euroclear
Group.\19\ ESA maintains intercompany agreements with EB that set forth
respective services and obligations.\20\
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\17\ In 2015, the Euroclear Group had assets under custody of
[euro]27.5 trillion, turnover equivalent to [euro]674.7 trillion,
and a settlement volume of 190.7 million netted transactions.
Euroclear Group's collateral management platform, the Collateral
Highway, processed collateralized transactions in 2015 for an amount
of [euro]1.068 trillion on a daily basis. See Modification
Application, Exhibit S-1 at 3.
\18\ See Modification Application, Exhibit A-2.
\19\ See Modification Application, Exhibit S-1 at 3.
\20\ Id.
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As previously noted, all services performed by EB that relate to
securities settlement and custody are part of the Euroclear System,
which is designated as a securities settlement system under the Belgian
Settlement Finality Act.\21\ According to EB, Belgian law provides for
robust asset protection rights for assets deposited in the Euroclear
System and for the protection of the holding of assets on the books of
EB.\22\ EB further

[[Page 93996]]

represents that Belgian law and EB's arrangements provide a high degree
of certainty with regards to finality of transfers on EB's books, the
holding of collateral in accounts, the contractual framework of
participants in the Euroclear System, and default procedures.\23\
---------------------------------------------------------------------------

\21\ See Modification Application, Exhibit K-5 at 22.
\22\ See Modification Application, Exhibit S-1 at 35.
\23\ See Modification Application, Exhibit S-1 at 35.
---------------------------------------------------------------------------

To utilize the Euroclear System, EB participants enter into a
contractual relationship with EB to open and maintain securities and
cash accounts at EB.\24\ EB participants agree that their rights to
assets held in the Euroclear System are defined and governed by Belgian
law.\25\ EB states that, under Belgian law, EB generally is the
beneficiary of a statutory lien on assets in accounts held at EB to
secure any claim it has against EB participants arising in connection
with the clearance or the settlement of transactions through, or in
connection with, the Euroclear System, including claims resulting from
loans or advances.\26\
---------------------------------------------------------------------------

\24\ See Modification Application, Exhibit J.
\25\ Specifically, EB represents that EB participants' rights in
securities held in the Euroclear System are defined and governed by
Belgian Royal Decree No. 62 dated Nov. 10, 1967 on the Deposit of
Fungible Financial Instruments and the Settlement of Transactions
involving such Instruments or similar Belgian legislation. EB states
that the applicable Belgian law is effectively similar to securities
entitlements under Revised Article 8 of the Uniform Commercial Code.
See Modification Application, Exhibit S-1 at 36.
\26\ See Modification Application, Exhibit E-5 at 34.
---------------------------------------------------------------------------

EB represents that it is subject to consolidated supervision by the
National Bank of Belgium (``NBB'') and the Belgian Financial Services
Market Authority (``FSMA'').\27\ EB also represents that NBB supervises
ESA, due to its status as an authorized holding company of a regulated
credit institution (i.e., EB) and as an institution assimilated to a
securities settlement system (i.e., the Euroclear System).\28\
---------------------------------------------------------------------------

\27\ See Modification Application, Exhibit S-1 at 20.
\28\ See Modification Application, Exhibit S-1 at 20. According
to EB, pursuant to Article 20, Sec. 2 of the Belgian Royal Decree
of September 26, 2005, institutions assimilated to a settlement
institution may not have shareholdings in commercial companies
without the prior approval of the NBB, unless the shareholding is
taken in companies whose activities consist, in whole or in part, in
the activities that a settlement institution or an institution
assimilated thereto may carry out.
---------------------------------------------------------------------------

According to EB, the NBB exercises its supervision over EB and ESA
on a consolidated basis.\29\ Specifically, the NBB has prudential
supervision and oversight over EB as a licensed credit institution
operating in Belgium. Furthermore, the NBB supervises EB in its role as
operator of the Euroclear System and as a recognized CSD. EB states
that the NBB is required to ensure: (1) That EB's clearance,
settlement, and payment systems operate properly; (2) that those
systems are efficient and sound; and (3) that EB meets the obligations
applicable to credit institutions under applicable European law, as
adopted into Belgian law.\30\ EB represents that the NBB has the
authority to order EB to limit, suspend, or stop activities if EB does
not comply with the regulatory requirements of its various
authorizations.\31\ EB also states that the NBB assesses EB under the
Principles for Financial Market Infrastructures (``PFMI'') and
considers best practices where appropriate.\32\
---------------------------------------------------------------------------

\29\ Id. In addition, EB is submitted to the Regulation 575/2013
of 26 June 2013 on prudential requirements for credit institutions
and investment firms (CRR) IV, and Regulation 909/2014 of 23 July
2014 on improving securities settlement in the European Union and on
central securities depositaries (CSDR). See Modification
Application, Exhibit K-5 at 16.
\30\ See Modification Application, Exhibit S-1 at 20.
\31\ Id.
\32\ See Modification Application, Exhibit S-1 at 20. The PFMI
are standards applicable to financial market infrastructures, such
as CSDs and securities settlement systems. Committee on Payment and
Settlement Systems (now the Committee on Payment and Market
Infrastructure) and Technical Committee of the International
Organization of Securities Commissions, Principles for financial
market infrastructures (Apr. 16, 2012), available at https://www.bis.org/publ/cpss101a.pdf.
---------------------------------------------------------------------------

EB further represents that the FSMA regulates EB for the purposes
of compliance with investor protection rules and rules on the
operation, integrity, and transparency of the Belgian financial
markets.\33\ These include requirements relating to conflicts of
interest with clients, customer protection in case of insolvencies, and
enforcement of conduct requirements.
---------------------------------------------------------------------------

\33\ See Modification Application, Exhibit S-1 at 20-21.
---------------------------------------------------------------------------

B. Current Activities

The Existing Exemption permits EB to provide the U.S. Government
Securities Clearing Agency Activities to U.S. Participants.\34\ Under
the terms of the Existing Exemption, the Commission places a limit on
the volume of transactions in U.S. Government Securities conducted by
U.S. Participants that can be settled through the Euroclear System.
Specifically, the average daily volume of U.S. Government Securities
settled through the Euroclear System for U.S. Participants may not
exceed five percent of the total average daily dollar value of the
aggregate volume in U.S. Government Securities.\35\ To facilitate the
monitoring of compliance with the volume limit and the impact of EB's
operations on the U.S. Government Securities market under the Existing
Exemption, EB is required to provide the Commission with quarterly
reports, calculated on a twelve-month rolling basis, of (i) the average
daily volume of transactions in eligible U.S. Government Securities for
U.S. Participants that are subject to the volume limit and (ii) the
average daily volume of transactions in eligible U.S. Government
Securities for all Euroclear System participants, whether or not
subject to the volume limit.\36\ EB is also required to notify the
Commission regarding material adverse changes in any account maintained
in the Euroclear System for U.S. Participants.\37\ In addition, EB is
required to respond to Commission requests for information regarding
any U.S. Participant about whom the Commission has financial solvency
concerns, including, for example, a settlement default by a U.S.
Participant.\38\ The Commission also requires a satisfactory memorandum
of understanding with the Belgian banking and securities regulator
(currently the NBB) to facilitate the provision of information by EB to
the Commission.\39\
---------------------------------------------------------------------------

\34\ See Original Exemption Order, supra note 1, at 8239.
\35\ See id. at 8239.
\36\ See Original Exemption Order, supra note 1, at 8240. EB's
non-U.S. participants are not subject to any restrictions under the
Existing Exemption.
\37\ For purposes of the Original Exemption Order, the term
``material adverse changes'' included (i) the termination of any
U.S. Participant; (ii) the liquidation of any securities collateral
pledged by a U.S. Participant to secure an extension of credit made
through the Euroclear System; (iii) the institution of any
proceedings to have a U.S. Participant declared insolvent or
bankrupt; or (iv) the disruption or failure in whole or in part in
the operations of the Euroclear System either at its regular
operating location or at its contingency center. See Original
Exemption Order, supra note 1, at 8240, n.78.
\38\ See Original Exemption Order, supra note 1, at 8240.
\39\ See 2001 Exemption Modification Order, supra note 1, at
821; see also Understanding Regarding an Application of Euroclear
Bank for an Exemption Under U.S. Federal Securities Laws (January
30, 2001) available at https://www.nbb.be/doc/cp/nl/aboutcbfa/mou/pdf/mou_2001-01-30_euroclearbank.pdf.
---------------------------------------------------------------------------

EB participants are able to utilize various clearance and
settlement services through the Euroclear System.\40\ Among those
services are the EB collateral management services (``EB-CMS''), which
provide a framework for exchanging collateral to fulfill bilateral
obligations between counterparties.\41\ Parties to bilateral
arrangements that require the posting of collateral by one party
(``Collateral Giver'') in favor of the other party

[[Page 93997]]

(``Collateral Taker'') may use the EB-CMS to secure credit exposures
arising under such bilateral arrangements. The terms of such bilateral
arrangements and related collateral needs (including the credit
exposure, collateral requirements, and collateral terms) are negotiated
and agreed between the parties independently of EB. After such
arrangements are agreed, the parties then enter into an agreement with
EB to provide the EB-CMS.
---------------------------------------------------------------------------

\40\ See Modification Application, Ex. J.
\41\ See Modification Application, Ex. S-1 at 3.
---------------------------------------------------------------------------

EB states that its non-U.S. participants use the EB-CMS to meet
collateral obligations with a variety of assets, including U.S.
Government Securities and U.S. Equity Securities.\42\ EB also
represents that U.S. Participants currently use the EB-CMS to meet
collateral obligations with a wide variety of assets including U.S.
Government Securities, but not including U.S. Equity Securities, as EB
prohibits U.S. Participants from holding U.S. Equity Securities in an
account at EB for any purpose as part of its contractual documentation
with its participants, consistent with the terms of the Existing
Exemption (``Current Equities Restrictions'').\43\ EB represents that
automated systems protocols and control procedures are implemented in
the Euroclear System to enforce the Current Equities Restrictions. The
systems protocols consist of coded validation rules that are part of
EB's fully automated and standard processes that run prior to the
settlement of any securities movement to or from an account held at
EB.\44\
---------------------------------------------------------------------------

\42\ See Modification Application, Exhibit S-1 at 34.
\43\ Id. EB's customer contracts provide that: ``Due to
restrictions imposed on Euroclear Bank by the United States
Securities and Exchange Commission (S.E.C.) following SEC Rule
17Ab2-1, equities, ETFs and REITs issued by companies incorporated
in a state or territory of the United States can be held in
Euroclear Bank by non-US Participants only.'' See Modification
Application, Exhibit S-1 at 6.
\44\ See Modification Application, Exhibit S-1 at 34.
---------------------------------------------------------------------------

C. Modification Application

EB has requested that the Commission broaden the Existing Exemption
to allow it to provide the EB-CMS to its U.S. Participants using U.S.
Equity Securities. Specifically, EB has requested that the Commission:
(1) Continue the Existing Exemption under substantially similar
conditions except as otherwise specified herein, (2) broaden the
Existing Exemption to allow EB to provide the U.S. Equities Clearing
Agency Activities under new conditions applicable to those activities,
and (3) apply conditions to EB that are largely harmonized between the
U.S. Government Securities Clearing Agency Activities and U.S. Equities
Clearing Agency Activities (collectively, the ``Clearing Agency
Activities'').\45\ Below the Commission discusses each of these
requests in turn.
---------------------------------------------------------------------------

\45\ In harmonizing the conditions between the Clearing Agency
Activities, new operational risk conditions, set forth in Part IV.C,
and certain additional other conditions, set forth in Part IV.D,
would also apply to the U.S. Government Securities Clearing Agency
Activities.
---------------------------------------------------------------------------

First, EB has requested that the Commission continue the Existing
Exemption to conduct the U.S. Government Securities Clearing Agency
Activities without: (i) Requiring EB to register as a clearing agency
with the Commission; (ii) changing the definition of the terms U.S.
Government Securities or U.S. Participants, as set forth in the
Existing Exemption; or (iii) changing the conditions set forth in the
Existing Exemption with regards to the U.S. Government Securities
Clearing Agency Activities, listed below:

(a) Volume Limit. The average daily volume of transactions in
eligible U.S. Government Securities for U.S. Participants processed
through EB as operator of the Euroclear System may not exceed five
percent of the total average daily dollar value of the aggregate
volume in eligible U.S. Government Securities.
(b) Commission Access to Information regarding U.S. Government
Securities Clearing Agency Activities. EB will continue to provide
the Commission with quarterly reports, calculated on a twelve-month
rolling basis, of (a) the average daily volume of transactions in
eligible U.S. Government Securities for U.S. Participants that are
subject to the volume limit as described in Section IV.C.2 of the
Original Exemption Order and (b) the average daily volume of
transactions in eligible government securities for all Euroclear
System participants, whether or not subject to the volume limit as
described in Section IV.C.2 of the Original Exemption Order.\46\
---------------------------------------------------------------------------

\46\ See Modification Application, Exhibit S-1 at 39.

Second, EB has requested that the following conditions of the
Existing Exemption with regards to the U.S. Government Securities
---------------------------------------------------------------------------
Clearing Agency Activities be replaced and superseded:

(a) The obligations in Section IV.C.3 of the Original Exemption
Order to provide disclosure documents to the Commission;
(b) the obligations in Section IV.C.3 of the Original Exemption
Order to file with the Commission amendments to its application for
exemption on Form CA-1; and
(c) the obligations in Section IV.C.3 of the Original Exemption
Order to notify the Commission regarding material adverse changes in
any account maintained by Euroclear for its U.S. Participants and to
respond to a Commission request for information about any U.S.
Participant about whom the Commission has financial solvency
concerns.\47\
---------------------------------------------------------------------------

\47\ See id.

The conditions set forth in Part IV.D would replace the above and
include, among other things, substantially similar obligations to the
above.
Third, EB has requested that the Commission permit EB to provide,
without registering as a clearing agency with the Commission, the U.S.
Equities Clearing Agency Activities, subject to certain conditions. As
described in the Modification Application, EB's provision of U.S.
Equities Clearing Agency Activities would entail activities such as
custody and safekeeping,\48\ settlement,\49\ and asset servicing \50\
on behalf of U.S. Participants with respect to U.S. Equity Securities.
For example, EB would maintain securities accounts on its books,\51\
provide safekeeping of and recordkeeping for those securities
accounts,\52\ settle instructions by participants,\53\ and provide
recordkeeping and reporting in real time on the status of settlement to
participants.\54\ EB also would process corporate actions as part of
its asset servicing business for any U.S. Equity Securities that remain
in EB's account held at DTC on the record date.\55\
---------------------------------------------------------------------------

\48\ See Modification Application, Exhibit S-1 at 4.
\49\ See Modification Application, Exhibit S-1 at 5.
\50\ See Modification Application, Exhibit S-1 at J-3.
\51\ See Modification Application, Exhibit S-1 at 2.
\52\ See Modification Application, Exhibit K-5 at 80-81.
\53\ See Modification Application, Exhibit K-5 at 76, 83.
\54\ See Modification Application, Exhibit K-5 at 76.
\55\ See Modification Application, Exhibit J-3.
---------------------------------------------------------------------------

The EB-CMS would be offered to U.S. Participants in support of
their obligations under security-based swap transactions, securities
lending transactions, and repurchase agreements, among other
transactions.\56\ The EB-CMS would independently verify that the
collateral proposed and provided by the Collateral Giver meets the
terms reported by the counterparties for the duration of the collateral
obligation.\57\ EB would do this by calculating the exchange of value
necessary to meet the collateral obligation information entered in by
the users of the EB-CMS, including by making value determinations, such
as marking to market the value of the

[[Page 93998]]

collateral based on reference data.\58\ Also, EB would generate
instructions and communicate the instructions to EB's settlement
processing infrastructure to transfer collateral among the Collateral
Accounts.\59\ Under the Existing Exemption, EB may already offer the
EB-CMS for U.S. Government Securities to U.S. Participants, but EB may
only offer the EB-CMS for U.S. Equity Securities to its non-U.S.
participants, because non-U.S. participants are not covered by the
scope of the Existing Exemption.
---------------------------------------------------------------------------

\56\ See, e.g., Modification Application, Exhibit P-2
(describing necessary revisions to its Operating Procedures related
to collateral services, derivatives services, loan services,
repurchase services, and securities lending services arising out of
the proposed U.S. Equities Clearing Agency Activities).
\57\ See Modification Application, Exhibit J-3.
\58\ See Modification Application, Exhibit K-5 at 60
(referencing obtaining the market value of a security. The EB-CMS
system does not apply any further haircuts or adjustments once the
market value is obtained from third party data providers); see also
Euroclear plc, Risk Management at Euroclear: Including Pillar 3
Disclosure 2012--Euroclear plc, at 43 (2012) (``Securities for which
Euroclear Bank does not obtain external quotations regularly can
also be valued according to the price associated with securities
transactions in the Euroclear system, or according to theoretical
models.''), available at https://www.euroclear.com/dam/Brochures/Pillar3_2012.pdf.
\59\ See Modification Application, Exhibit J-3.
---------------------------------------------------------------------------

D. Collateral Regulations and Related Infrastructure

According to the Modification Application, new and enhanced
regulatory requirements (``New Collateral Regulations'') are leading
counterparties to derivative and financing transactions to seek
streamlined margin processing and increased efficiency in the
availability and deployment of collateral.\60\ These New Collateral
Regulations are expected to be implemented in the European Union in the
near future.\61\ EB states that the regulatory changes include new
restrictions on eligible collateral, requiring the use of highly liquid
assets, prescribed haircuts, and segregation requirements, as well as a
prohibition on rehypothecation for initial margin. EB believes that,
when fully implemented, the New Collateral Regulations will result in
increased capital requirements, mandatory central clearing of more
derivative transactions, and new margining rules for bilateral trades,
which will increase demand for high quality collateral. EB projects
that the requirement for more transactions and exposures to be
collateralized globally will result in a significant increase in the
number of required collateral movements between market participants,
which will have implications for counterparty credit risk, funding and
capital charges, and reputational and operational risk.
---------------------------------------------------------------------------

\60\ See Modification Application, Exhibit S-1 at 6.
\61\ Id.; see also Peter Madigan, EU non-cleared margin regime
set to take effect in January 2017, Risk.net (Sept. 27, 2016)
(regarding the adoption and implementation of the draft Regulatory
Technical Standards on risk mitigation techniques for non-centrally
cleared OTC derivatives), available at https://www.risk.net/risk-magazine/news/2472246/eu-non-cleared-margin-regime-set-to-take-effect-in-january-2017.
---------------------------------------------------------------------------

EB also represents that these regulatory changes include
requirements for initial margin for counterparties to certain
derivative and financing transactions, as well as a reduction or
removal of unsecured thresholds for variation margin. EB expects that
these new initial margin requirements will significantly increase the
amount of collateral required to support a number of derivative and
financing transactions. In addition, EB represents that it is expected
that the removal or reduction of unsecured thresholds for variation
margin will mean any changes in underlying transaction valuations may
trigger increased margin calls, requiring market participants to hold
additional collateral available for posting.
EB represents that the New Collateral Regulations therefore are
expected to greatly increase the complexity of collateral management
and create new competition for collateral.\62\ Industry research cited
by EB indicates that as these regulatory changes take effect, the
volume of required collateral movements will increase and the number of
collateral settlement fails and associated costs are likely to rise
proportionally.\63\ EB has requested to broaden its exempt clearing
agency activities for the purpose of assisting its participants'
compliance with these regulations, which, as stated earlier, are
scheduled to take effect in the near future and which will
significantly affect the use of collateral. In connection with its
request, EB has taken preparatory measures to create the infrastructure
necessary to accommodate the U.S. Equities Clearing Agency Activities,
including the formation in 2014 of DEGCL, the joint venture between
Euroclear and DTCC. DEGCL describes itself as an open architecture
infrastructure designed to streamline collateral processing globally,
providing solutions for both over-the-counter derivatives and financing
that deliver transparency, collateral mobility, efficiency, and
security through its utility offerings.\64\ DEGCL is authorized as a
service company by the Financial Conduct Authority (``FCA'') in the
United Kingdom.\65\ EB represents that DEGCL seeks to provide services
to its users, including buy-side and sell-side financial institutions,
in meeting their risk management and regulatory requirements for the
holding and exchange of collateral as required by the New Collateral
Regulations.\66\ These services will be offered to users located
primarily in Europe and the U.S.\67\
---------------------------------------------------------------------------

\62\ EB states that collateral movements will need to be tracked
and applied against a growing number and type of credit support
documentation, while segregation rules will multiply the number of
collateral accounts needed and correspondingly increase the
complexity of accurately processing collateral movements across
account types, fragmented central clearing, and collateral delivery
channels. See Modification Application, Exhibit S-1 at 7; see also
Implications of Collateral Settlement Fails: An Industry Perspective
on Bilateral OTC Derivatives (Feb. 2016), available at https://www.imas.org.sg/uploads/media/2016/03/03/1046_Implications_of_Collateral_Settlement__FINAL.pdf
(``Implications of Collateral Settlement Fails''); Collateral
Management in Europe: Searching for Central Intelligence (May 2015),
available at https://www.euroclear.com/dam/Brochures/Euroclear-Collateral-Management-Aite-Paper.pdf; The Economics of Collateral
(Dec. 2013), available at https://dtcc.com/~/media/Files/Downloads/
WhitePapers/LSE%20Report.ashx.
\63\ See, e.g., Implications of Collateral Settlement Fails,
supra note 61, at 5.
\64\ See ``State street to pilot GlobalCollateral ltd's margin
settlement messaging service,'' DEGCL Press Release (July 11, 2016),
available at https://www.globalcollateral.net/press5-statestreet.html.
\65\ DEGCL's reference number as an authorized service company
is 686269. See FCA Financial Services Register, available at https://www.fca.org.uk/register.
\66\ See Modification Application, Exhibit S-1 at 7.
\67\ See id.
---------------------------------------------------------------------------

With respect to the U.S. Equities Clearing Agency Activities, DEGCL
will facilitate a U.S. Participant's repositioning of assets in U.S.
Participant-held accounts at The Depository Trust Company (``DTC'') for
use in the U.S. Participant's corresponding Collateral Account at EB in
the EB-CMS. In particular, these activities will be provided by the JV-
IMS, a DEGCL service offering that, according to DEGCL, will automate
certain collateral management tasks, reposition inventory across
settlement locations in the U.S. and Europe, and thereby make
collateral more readily available.\68\ EB represents that the JV-IMS
would provide an automated mechanism for an entity that is both a
participant of EB and DTC (``JV-IMS User'') \69\ to receive
recommendations on how to reposition assets in the JV-IMS User's
account held at DTC, including U.S. Equity Securities, for subsequent
crediting of those assets to its Collateral Accounts within the EB-CMS
(and for the return of such assets to the JV-IMS User's account held at
DTC). To facilitate the JV-IMS, EB will become a participant at DTC,
subject to

[[Page 93999]]

approval by DTC, its standard membership requirements and certain
heightened requirements for a non-U.S. entity.\70\
---------------------------------------------------------------------------

\68\ See Modification Application, Exhibit S-1 at 8; ``State
street to pilot GlobalCollateral ltd's margin settlement messaging
service,'' DEGCL Press Release (July 11, 2016), available at: https://www.globalcollateral.net/press5-statestreet.html.
\69\ See id.
\70\ EB has signed a DTC Participant's Agreement pursuant to
which it agreed that the DTC rules shall be a part of the terms and
conditions of every contract or transaction that EB may make or have
with DTC. See id.; see also DTC Policy Statements on the Admissions
of Participants (June 2013).
---------------------------------------------------------------------------

To initially establish its sub-account held at DTC for the JV-IMS
prior to its initial use, a JV-IMS User will set parameters that
specify which types of assets in its account held at DTC (and in what
amounts) it will make available for the JV-IMS, including any limits or
criteria on those assets (such as ratings).\71\ The JV-IMS User will
then transfer assets that meet the parameters to a sub-account held at
DTC that is designated for, and dedicated to, the JV-IMS. The JV-IMS
will then monitor that information and independently verify that the
assets identified by the JV-IMS User meet its own parameters, as well
as the EB eligibility requirements (such as an accepted CUSIP number).
If so, the JV-IMS will prepare and submit to EB free-of-payment
delivery instructions (which EB will in turn submit to DTC on the JV-
IMS User's behalf) to transfer the assets identified by the JV-IMS User
in its designated sub-account held at DTC to EB's account held at
DTC.\72\ The JV-IMS will also prepare and submit instructions to EB to
credit such transferred assets from EB's account held at DTC to the
relevant JV-IMS User's Collateral Accounts.
---------------------------------------------------------------------------

\71\ See Modification Application, Exhibit S-1 at 8.
\72\ This process is subject to DTC rules governing EB's role in
repositioning assets. See Self-Regulatory Organizations; The
Depository Trust Company; Order Approving Proposed Rule Change to
Establish a Link with Euroclear, Exchange Act Release No. 78358
(July 19, 2016), 81 FR 48482 (July 25, 2016) (``DTC EB Link Rule'').
---------------------------------------------------------------------------

Additionally, the JV-IMS would facilitate the automated return of
such assets to the JV-IMS User's account held at DTC when necessary to
meet other settlement obligations and for corporate actions by
preparing and submitting to EB (for eventual forwarding by EB to DTC)
free-of-payment delivery instructions to transfer such assets from EB's
account held at DTC to the relevant JV-IMS User's sub-account held at
DTC. Finally, the JV-IMS would report to the JV-IMS User all settlement
instructions generated via the JV-IMS, the status of the generated
settlement instructions, and other relevant information in regards to
such settlement instructions. All of the foregoing would be subject to
the DTC rules regarding a link with EB that was approved by the
Commission in July 2016.\73\
---------------------------------------------------------------------------

\73\ See id.
---------------------------------------------------------------------------

After the JV-IMS User's assets are credited to EB's account held at
DTC via the JV-IMS processes described above, the assets would then be
credited to the Collateral Accounts for the relevant EB
participant.\74\ As stated above, with respect to the U.S. Equities
Clearing Agency Activities, EB's internal protocols would structure
these Collateral Accounts to allow U.S. Participants to: (1) Take
receipt of U.S. Equity Securities credited to the account via the JV-
IMS process described immediately above; (2) deliver U.S. Equity
Securities out of the Collateral Accounts for mobilization as
collateral through the EB-CMS infrastructure and to receive U.S. Equity
Securities into the Collateral Accounts mobilized from other
participants of the EB-CMS; and (3) deliver U.S. Equity Securities back
to the relevant JV-IMS User's sub-account at DTC. EB represents that
these transfer and use restrictions on Collateral Accounts would
prevent a U.S. Participant's U.S. Equity Securities held in Collateral
Accounts from being used for any other purposes in the Euroclear
System, such as normal settlement activity, except under certain
circumstances involving the default of a Collateral Giver.\75\
---------------------------------------------------------------------------

\74\ All settlement activity related to the JV-IMS that occurs
on the books of DTC is governed exclusively by DTC procedures. All
activity related to the use of assets that occurs on the books of EB
is governed exclusively by the EB contractual framework. See
Modification Application, Exhibit S-1 at 9.
\75\ See Modification Application, Exhibit S-1 at 11.
---------------------------------------------------------------------------

Currently, non-U.S. JV-IMS Users may move U.S. Equity Securities
from DTC to EB by transferring the securities to an account held at DTC
for EB's custodian. Approving the Modification Application would expand
the options available to non-U.S. participants, such that non-U.S. JV-
IMS Users holding U.S. Equity Securities at DTC could also transfer
U.S. Equity Securities to EB's DTC account. If a user of the EB-CMS
defaults, either a Collateral Taker or a Collateral Giver can notify EB
of a default under their bilateral transaction. EB's operations staff
would then initiate a process to override the regular controls that
govern use of U.S. Equity Securities as collateral and would instruct
DTC to debit those securities from EB's DTC Account and to credit them
to the account held at DTC for EB's custodian, while still being
credited to the non-defaulting party's account at EB.\76\
---------------------------------------------------------------------------

\76\ Id.
---------------------------------------------------------------------------

In the Modification Application, EB has proposed to amend the
Current Equities Restrictions\77\ to permit the use by U.S.
Participants of U.S. Equity Securities subject to the transfer and use
restrictions described above. In all other circumstances, the Current
Equities Restrictions would otherwise remain applicable.
---------------------------------------------------------------------------

\77\ See supra Part II.B.
---------------------------------------------------------------------------

III. Discussion

A. Statutory Standards

Section 17A of the Exchange Act directs the Commission to
facilitate the establishment of (i) a national system for the prompt
and accurate clearance and settlement of securities transactions and
(ii) linked or coordinated facilities for clearance and settlement of
securities transactions.\78\ In facilitating the establishment of the
national clearance and settlement system, the Commission must have due
regard for the public interest, the protection of investors, the
safeguarding of securities and funds, and maintenance of fair
competition among brokers and dealers, clearing agencies, and transfer
agents.\79\ Section 17A(b)(1) of the Exchange Act requires all clearing
agencies to register with the Commission.\80\ It also states that, upon
the Commission's motion or upon a clearing agency's application, the
Commission may conditionally or unconditionally exempt a clearing
agency from any provision of Section 17A of the Exchange Act or the
rules or regulations thereunder if the Commission finds that such
exemption is consistent with the public interest, the protection of
investors, and the purposes of Section 17A, including the prompt and
accurate clearance and settlement of securities and funds.\81\ The
Commission notes that it has previously found an exemption from
clearing agency registration under Section 17A(b)(1) to be an
appropriate response in instances where an entity has engaged in a
limited scope of clearing agency activity.\82\
---------------------------------------------------------------------------

\78\ See 15 U.S.C. 78q-1(a)(2).
\79\ See 15 U.S.C. 78q-1(a)(2)(A).
\80\ See 15 U.S.C. 78q-1(b); 17 CFR 240.17Ab2-1.
\81\ See 15 U.S.C. 78q-1(b)(1).
\82\ See Modification Application Notice, supra note 5, at
61277.
---------------------------------------------------------------------------

B. Comments Received

The Commission received four comment letters in response to the
Modification Application Notice.\83\ Commenters included U.S. market
participants and an industry representative. Among the commenters was
DTCC, which is the holding company for three clearing agencies
registered with the Commission and co-

[[Page 94000]]

owner of DEGCL. All of the commenters expressed support for the
Modification Application.
---------------------------------------------------------------------------

\83\ See supra note 6.
---------------------------------------------------------------------------

Each of the commenters stated that the proposed broadening of EB's
exempted clearing agency activity would benefit U.S. market
participants. One commenter stated that the Modification Application
would provide U.S. market participants with more options to meet
collateral and liquidity demands by providing access to an expanded
pool of high quality collateral.\84\ The commenter further explained
that the use of U.S. Equity Securities as collateral by non-U.S.
participants is common in the European Union, and the Modification
Application would help provide a level playing field between U.S.
Participants and non-U.S. participants in the types of U.S. securities
that can be offered as collateral in the EB-CMS.\85\ Another commenter
noted that the U.S. Equities Clearing Agency Activities would enable
U.S. market participants to optimize their management of U.S. Equity
Securities inventory by effectively and efficiently addressing
collateral management needs in other markets and time zones.\86\
Several commenters also stated that expanding the scope of activity
under the Existing Exemption to include U.S. Equity Securities would
result in lower costs for U.S. market participants and more efficient
capital management.\87\
---------------------------------------------------------------------------

\84\ See SIFMA letter at 2 (also noting that the Modification
Application would improve asset mobility for U.S. banks and broker-
dealers engaging in securities financing transactions); see also LGM
letter at 1 (stating that U.S. institutions would significantly
benefit from being allowed to use U.S. Equity Securities as
collateral in the international environment).
\85\ See SIFMA letter at 2.
\86\ See Paxos letter at 2-3; see also DTCC letter at 3 (stating
that the Modification Application would provide U.S participants
with the ability to optimize collateral globally).
\87\ See SIFMA letter at 2; DTCC letter at 3; Paxos letter at 3;
---------------------------------------------------------------------------

Each of the commenters also stated that the U.S. Equities Clearing
Agency Activities would reduce risk. One commenter stated that the
Modification Application would reduce systemic risk by supporting more
efficient allocation of collateral, thus reducing transaction costs and
the risk of settlement failures.\88\ Another commenter stated that the
effective management of collateral inventory on a real-time basis, as
described in the Modification Application, would reduce operational
risk and increase efficiency.\89\ A third commenter stated that
allowing U.S. Participants to use U.S. Equity Securities in the EB-CMS
would reduce settlement and liquidity risks across the broader
securities markets.\90\
---------------------------------------------------------------------------

\88\ See SIFMA letter at 3; see also DTCC letter at 3 (stating
that the JV-IMS will reduce systemic risk by supporting the more
efficient allocation of collateral, reducing transaction costs and
the risk of settlement failures.).
\89\ See Paxos letter at 2.
\90\ See LGM letter at 1.
---------------------------------------------------------------------------

In addition, the commenters more generally endorsed the
Modification Application based on EB's reputation as a market
infrastructure provider.\91\ One commenter explained that EB provides
its participants with an efficient means of acquiring, holding,
transferring, and pledging security entitlements by electronic book
entry on its records outside the U.S., either free of or versus
payment, in multiple currencies.\92\ Commenters also noted more
generally that EB is well-known and well-regulated,\93\ and that it
operates in a manner consistent with the PFMI.\94\
---------------------------------------------------------------------------

\91\ See DTCC letter at 3; Paxos letter at 1; SIFMA letter at 3.
\92\ See Paxos letter at 1.
\93\ See LGM letter at 2-3.
\94\ See DTCC letter at 3; Paxos letter at 1; SIFMA letter at 3.
---------------------------------------------------------------------------

Finally, one commenter expressed views regarding the specific terms
and conditions in the Modification Application Notice. The commenter
expressed a favorable view of the Modification Application, stating
that, given the limited scope of the modification request, and in light
of the increased transparency that would result from the additional
monitoring, reporting, and other conditions proposed by EB in the
Modification Application, the Commission should consider EB compliant
with applicable regulatory standards.\95\ The commenter also requested
that the Commission use the proposed reporting conditions to monitor
the growth of the U.S. Equities Clearing Agency Activities rather than
establish a fixed volume limit at this time, noting that the proposed
reporting conditions would provide the Commission with greater
transparency and broader visibility into cross-border collateral
management.\96\ In addition, the commenter stated that it did not see
other providers being disadvantaged by an expansion of EB's exempted
activity.\97\
---------------------------------------------------------------------------

\95\ See Paxos letter at 1-2.
\96\ See id.
\97\ See id.
---------------------------------------------------------------------------

C. Evaluation of the Modification Application

With respect to the U.S. Government Securities Clearing Agency
Activities, the Modification Application does not propose to make any
material changes to the U.S. Government Securities Clearing Agency
Activities, and therefore the Commission is not reconsidering the
appropriateness of an exemption for those activities in this order. In
addition, EB has represented in the Modification Application that it
continues to meet the standards previously applied when the Commission
approved the Existing Exemption,\98\ and for the purposes of its
consideration of the Modification Application, the Commission is taking
those representations into account.\99\
---------------------------------------------------------------------------

\98\ See Modification Application, Exhibit S-1 at 13.
\99\ The Commission also notes that it has no basis to believe
that EB has not operated within and otherwise performed in
accordance with the terms and conditions of the Existing Exemption.
---------------------------------------------------------------------------

With respect to the U.S. Equities Clearing Agency Activities, the
Commission believes that, while such activities reflect an expansion of
the range of securities for which EB may perform clearing agency
functions relative to the Existing Exemption, those additional clearing
agency functions would remain limited because EB would necessarily rely
on its link with DTC to perform them. For example, the Modification
Application requests only that EB be permitted to settle collateral
movements involving U.S. Equity Securities and that the settlement of
those collateral movements occur through the use of dedicated accounts
at EB and DTC structured so that a U.S. Participant can only: (i)
Receive U.S. Equity Securities in these accounts; (ii) deliver U.S.
Equity Securities out of these accounts for mobilization as collateral
in the EB infrastructure; and (iii) deliver U.S. Equity Securities back
to the relevant user's account at DTC.\100\ The Modification
Application does not request that EB be permitted to provide the full
range of CSD and securities settlement activities for the purchase or
sale of such securities. Finally, the Commission believes that the
terms and conditions of the exemption set forth in this order would, as
noted by one of the commenters,\101\ assist the Commission in
evaluating and monitoring the U.S. Equities Clearing Agency Activities
on an ongoing basis to assess, among other considerations, how such
limited

[[Page 94001]]

activity interacts with other aspects of the national clearance and
settlement system and whether the exemption and its conditions remain
appropriate. Accordingly, the Commission believes that an exemption
subject to the terms and conditions set forth herein, rather than full
registration as a clearing agency, continues to be the appropriate
regulatory status for EB.
---------------------------------------------------------------------------

\100\ See Modification Application, Exhibit S-1, at 9-10.
\101\ See Paxos letter at 3 (responding to a request for comment
in the Modification Application Notice regarding whether the
Commission should include among the conditions for the U.S. Equities
Clearing Agency Activities a volume limit similar to the volume
limit under the Existing Exemption that applies to the U.S.
Government Securities Clearing Agency Activities and stating that a
fixed volume limit should not be added as a condition). The
Commission does not believe that such a condition is necessary and
has declined to include it.
---------------------------------------------------------------------------

Below, the Commission evaluates EB's request for an exemption from
registration as a clearing agency for the U.S. Equities Clearing Agency
Activities under Section 17A(b)(1) of the Exchange Act, including
whether the Modification Application is consistent with the public
interest, the protection of investors, and the purposes of Section 17A
of the Exchange Act. The Commission also describes the specific
conditions that will be imposed in connection with the approval of EB's
request for an exemption and explains its rationale for such
conditions.
1. Facilitating the Establishment of Linked or Coordinated Facilities
for the Settlement of Transactions
Congress found that the linking of settlement facilities and the
development of uniform standards and procedures for settlement will
reduce unnecessary costs and increase the protection of investors, and
directed the Commission to use its authority to facilitate the
establishment of linked or coordinated facilities for settlement of
transactions in securities.\102\ As previously described, EB will
perform the U.S. Equities Clearing Agency Activities using settlement
facilities linked between DTC, a clearing agency registered with the
Commission, and EB.\103\ For the reasons discussed in the Modification
Application Notice and as discussed further below, the Commission
believes that links and coordination between these two settlement
providers will foster the establishment of uniform standards and
procedures, which in turn may result in benefits to participants of
both DTC and EB resulting from such standardization.
---------------------------------------------------------------------------

\102\ See 15 U.S.C. 78q-1(a)(1)(D), (a)(2)(A)(ii).
\103\ See Self-Regulatory Organizations; The Depository Trust
Company; Order Approving Proposed Rule Change to Establish a Link
with Euroclear, Exchange Act Release No. 34-78358 (July 19, 2016),
81 FR 48482 (July 25, 2016).
---------------------------------------------------------------------------

Commenters generally agreed that the proposed link between EB and
DTC would provide benefits to U.S. market participants. One commenter
explained that the U.S. Equities Clearing Agency Activities could help
U.S. market participants optimize the management of their U.S. Equity
Securities inventory by efficiently addressing management needs in
other markets and time zones.\104\ Another commenter stated that adding
the ability to reposition equity assets held at DTC for transactions on
the books at EB would provide common participants of DTC and EB with
the ability to optimize collateral globally, reduce costs, and manage
their balance sheets in a capital efficient manner.\105\ The Commission
agrees that the greater coordination among settlement providers in
performing the U.S. Equities Clearing Agency Activities is consistent
with the public interest because it could facilitate improved asset
mobilization generally, benefiting U.S. market participants.
---------------------------------------------------------------------------

\104\ See Paxos letter at 2.
\105\ See DTCC letter at 3.
---------------------------------------------------------------------------

2. Safeguarding Securities and Funds Related to the Settlement of
Securities Transactions
Congress found that the safeguarding of securities and funds
related to the settlement of securities transactions is necessary for
the protection of investors, and directed the Commission to have due
regard for the safeguarding of securities and funds in the use of its
authority under Section 17A of the Exchange Act.\106\ Accordingly, the
Commission has reviewed EB's representations with respect to its rules,
procedures, and controls on the rights of securities issuers and
holders; the creation of securities positions within client accounts;
the regular review of such procedures and controls by EB's internal
audit department and external auditor; the enterprise risk management
framework EB operates under; and the role that DTC will play as a
depository for U.S. Equity Securities. As discussed in the Modification
Application Notice, the Commission has adopted rules under Section 17A
of the Exchange Act that, among other things, help facilitate the
safeguarding of funds and securities by registered clearing
agencies.\107\ For example, the Commission's rules require certain
registered clearing agencies to have policies and procedures to, among
other things, immobilize or dematerialize securities certificates and
transfer them by book entry to the greatest extent possible; eliminate
principal risk by linking securities transfers to funds transfers;
identify sources of operational risk and minimize them through the
development of appropriate systems, controls and procedures; and have
business continuity plans that allow for timely recovery of operations
and fulfillment of a clearing agency's obligations.\108\ The Commission
has also noted that registered clearing agencies develop and maintain
plans to assure the safeguarding of securities and funds; the integrity
of automated data processing systems; the recovery of securities,
funds, or data under a variety of loss or destruction scenarios; and
have business continuity plans that allow for the timely recovery of
operations and the fulfillment of a registered clearing agency's
obligations.\109\
---------------------------------------------------------------------------

\106\ See 15 U.S.C. 78q-1(a)(1)(A), (2)(A).
\107\ See 12 CFR 240.17Ad-22(d); 12 CFR 242.1000 et seq.; see
also 12 CFR 240.17Ad-22(e) (adopted subsequent to publication of the
Modification Application Notice with a compliance date of April 11,
2017).
\108\ See 12 CFR 240.17Ad-22(d)(4), (10), and (13).
\109\ See Exchange Act Release No. 34-68080 (Oct. 22, 2012), 77
FR 66219, 66268 (Nov. 2, 2012).
---------------------------------------------------------------------------

EB has rules and procedures in place to ensure that the creation of
securities positions is only performed upon receipt of securities to be
credited to client accounts, and that removal of these securities
positions is processed without manual intervention and upon final
maturity or in accordance with a corporate event. Additionally, EB
represents that it reports movements in client accounts to clients on a
daily basis, and that it regularly reviews its procedures and
controls.\110\ EB's risk mitigation practices and internal controls are
also subject to regulatory oversight by the NBB. The Commission notes
that commenters also viewed favorably EB's ability to safeguard
securities and funds, stating that EB is a well-known and well-
regulated market infrastructure provider that operates under
internationally developed standards,\111\ and that EB has a 40-plus-
year record of efficiently managing settlements and custody across
numerous markets.\112\ Finally, the conditions set forth below will
allow the Commission to examine EB and monitor the U.S. Equities
Clearing Agency Activities so that the Commission can assess any impact
the activities may have on U.S. market participants and the U.S.
securities markets. In this respect, the Commission believes that EB's
operations are consistent with the Commission's current regulatory
approach to the safeguarding of securities and funds related to the
settlement of securities transactions, and consistent with the
protection of investors, because the transfer of securities will take
place via book entry at EB. As described in the Modification

[[Page 94002]]

Application Notice, the Commission has previously stated its belief
that the immobilization and dematerialization of securities and their
transfer by book entry results in reduced costs and risks associated
with securities settlements and custody by removing the need to hold
and transfer many, if not most, physical certificates.\113\
Accordingly, the Commission believes that approval of the Modification
Application would be consistent with the public interest and the
protection of investors generally, and specifically, the safeguarding
of securities and funds under EB's provision of the U.S. Equities
Clearing Agency Activities.
---------------------------------------------------------------------------

\110\ Part of this review includes an International Standard on
Assurance Engagements 3402 report, which, pursuant to the conditions
set forth in Part IV.C, will be provided to the Commission on an
annual basis.
\111\ See DTC letter at 3; SIFMA letter at 3.
\112\ See LGM letter at 1.
\113\ See Exchange Act Release No. 34-68080 (Oct. 22, 2012), 77
FR 66219, 66253 (Nov. 2, 2012).
---------------------------------------------------------------------------

3. Prompt and Accurate Settlement of Securities Transactions
Congress found that the prompt and accurate clearance and
settlement of securities transactions is necessary for the protection
of investors and that inefficient procedures for settlement imposed
unnecessary costs on investors.\114\ For the reasons discussed in the
Modification Application Notice and as discussed further below, the
Commission believes that approval of the Modification Application would
promote the prompt and accurate clearance and settlement of securities
transactions and the protection of investors because EB's settlement
process is consistent with prior Commission observations regarding
delivery versus payment (``DVP'') systems. The Commission has
previously stated that DVP reduces the risk that a party would lose
some or its entire principal because payment is made only if securities
are delivered.\115\ The Commission also believes that a DVP method
reduces the potential that delivery of the security is not
appropriately matched with payment for a security. Therefore, the
Commission believes the use of a DVP method promotes the clearing
agency's ability to facilitate prompt and accurate clearance and
settlement.\116\ One commenter addressed how EB eliminates the
principal risk described above in noting that EB currently provides its
participants with an efficient means of acquiring, holding,
transferring, and pledging security entitlements by electronic book
entry on its records outside the U.S., either free of or versus
payment, in multiple currencies.\117\ The Commission notes that the EB
system has controls in place requiring the availability of the cash and
securities before executing instructions (i.e., positioning),
preventing settlement of the transaction if the cash and/or the
securities are not available.\118\ These rules and controls help
address the principal risk inherent in settling linked obligations.
---------------------------------------------------------------------------

\114\ See 15 U.S.C. 78q-1(a)(1)(A), (B).
\115\ See 77 FR at 66256.
\116\ See id.
\117\ See Paxos letter at 1.
\118\ In addition, EB represents that the Euroclear System is a
delivery-versus-payment system, which settles instructions between
clients with finality of the transfer of securities from the seller
to the buyer occurring at the same time as the finality of transfer
of funds from the buyer to the seller.
---------------------------------------------------------------------------

Multiple commenters noted the potential gains in efficiency to be
had by U.S. Participants if EB were to expand its current services to
include U.S. Equity Securities. One commenter cited EB's real-time
management of collateral inventory as being integral to reducing
operational risk and increasing efficiencies,\119\ while another cited
positively EB's ability to facilitate the efficient deployment of
collateral at a time where new regulatory regimes significantly
increase the demand for high-grade assets.\120\ The Commission believes
that EB's operations, as represented to the Commission, are conducted
in a manner that is consistent with the promptness and accuracy
requirements under Section 17A of the Exchange Act. This will enable
the efficient transfer of assets, which helps protect investors and
provides benefits to U.S. market participants.
---------------------------------------------------------------------------

\119\ See Paxos letter at 2.
\120\ See SIFMA letter at 2.
---------------------------------------------------------------------------

4. Maintenance of Fair Competition Among Market Participants
The Commission is directed to have due regard for the maintenance
of fair competition in the use of its authority under Section 17A of
the Exchange Act.\121\ One commenter stated that the Modification
Application would provide a level playing field between U.S.
Participants and non-U.S. participants in the types of U.S. securities
they can offer as collateral in the EB-CMS, noting that the use of U.S.
Equity Securities as collateral within the EB-CMS is already common
among EB's non-U.S. participants in the European Union.\122\ Another
commenter stated that it did not foresee other providers of collateral
management services to be disadvantaged by approval of EB's
Modification Application; rather, the commenter expected the
Modification Application to be beneficial by expanding the options that
participants and their clients have for addressing collateral
demands.\123\ The Commission notes that approval will reduce the
disparity between U.S. Participant and non-U.S. participant utilization
of the EB-CMS, but the Commission does not believe EB's proposal will
have a direct impact on the current competitive landscape for the
provision of settlement of transactions in U.S. Equity Securities for
U.S. market participants more generally because Euroclear will not
provide settlement for purchase and sale transactions in U.S. Equity
Securities. Accordingly, the Commission believes that the Modification
Application is consistent with Section 17A of the Exchange Act because
it should facilitate fair competition between U.S. Participants and
non-U.S. participants, consistent with the public interest, and would
not prevent U.S. market participants from using other comparable
services that may be (or become) available.
---------------------------------------------------------------------------

\121\ See 15 U.S.C. 78q-1(a)(2)(A).
\122\ See SIFMA Letter at 2.
\123\ See Paxos Letter at 3.
---------------------------------------------------------------------------

IV. Terms and Conditions of Exemption

This order grants EB an exemption from registration as a clearing
agency under Section 17A of the Exchange Act to perform the Clearing
Agency Activities described above. The exemption is granted subject to
the conditions set forth below, which the Commission believes are
necessary and appropriate in light of the statutory requirements of
Section 17A. The Commission is including specific conditions to this
exemption designed to facilitate the establishment of a national system
for the prompt and accurate clearance and settlement of securities
transactions and the establishment of linked and coordinated facilities
for the clearance and settlement of securities transactions. In the
Modification Application, the Commission discussed the origin and
purpose of each of these conditions.\124\ The conditions are designed
to promote coordination, the safeguarding of securities and funds, and
fair competition among market participants. The conditions replace and
supersede all conditions set forth in the Existing Exemption.
---------------------------------------------------------------------------

\124\ See Modification Application Notice, supra note 5, at
61280-81.
---------------------------------------------------------------------------

A. Continuation of Conditions Applicable to the U.S. Government
Securities Clearing Agency Activities

(1) The average daily volume of eligible U.S. Government Securities
processed for U.S. Participants through EB as operator of the Euroclear
System may not exceed five percent of the total average daily dollar
value of the

[[Page 94003]]

aggregate volume in eligible U.S. Government Securities.
(2) EB will provide the Commission with quarterly reports,
calculated on a twelve-month rolling basis, of: (a) The average daily
volume of transactions in eligible U.S. Government Securities for U.S.
Participants that are subject to the volume limit; and (b) the average
daily volume of transactions in eligible U.S. Government Securities for
all Euroclear System participants.

B. Condition Applicable to the U.S. Equities Clearing Agency Activities

EB shall provide to the Commission quarterly reports, calculated on
a twelve-month rolling basis, of: (1) The average daily value of U.S.
Equity Securities that are held in Collateral Accounts at EB for U.S.
Participants and a break-down of the general types of EB collateral
agreements in respect of which such value is given as collateral; (2)
the average daily value of U.S. Equity Securities that are held in EB's
account at DTC relating to inventory management services; and (3) the
total value, and a break-down of the general types of EB collateral
agreements in respect of which such value is given as collateral, of
U.S. Equity Securities that are transferred from Collateral Accounts of
U.S. Participants at EB to other Securities Clearance Accounts at EB
(other than IMS-Linked Accounts) pursuant to a liquidation of such
collateral.

C. Operational Risk Conditions Applicable to the Clearing Agency
Activities

(1) Prior to commencing the U.S. Equities Clearing Agency
Activities,\125\ EB shall demonstrate to the Commission that EB
maintains written policies and procedures applicable to those systems
that support or are integrally related to the Clearing Agency
Activities (the ``Systems'') that, on an ongoing basis, are reasonably
designed to:
---------------------------------------------------------------------------

\125\ In the Modification Application Notice, this condition
stated: ``EB shall demonstrate to the Commission or its designee
prior to commencing the U.S. Equities Clearing Agency Activities
that EB maintains written policies and procedures applicable to
those systems that support or are integrally related to the Clearing
Agency Activities (the ``Systems'') that, on an ongoing basis, are
reasonably designed to.'' The Commission has modified this condition
to improve clarity. In addition, here and below the Commission has
removed references to ``or its designee'' because the reference is
not necessary.
---------------------------------------------------------------------------

(a) Establish a robust operational risk-management framework
applicable to the Systems with appropriate systems, policies,
procedures, and controls to identify, monitor, and manage operational
risks;
(b) Clearly define the roles and responsibilities of EB personnel
for addressing operational risk (e.g., identify a senior manager
responsible for compliance with the operational conditions applicable
to the Systems);
(c) Review operational policies, procedures, and controls
applicable to the Systems;
(d) Audit the Systems, and test the Systems periodically and at
implementation of significant changes;
(e) Clearly define operational reliability objectives for the
Systems;
(f) Ensure that the Systems have scalable capacity adequate to
handle increasing stress volumes and achieve the Systems service-level
objectives;
(g) Establish comprehensive physical and information security
policies that address all potential vulnerabilities and threats to the
Systems;
(h) Establish a business continuity plan for the Systems that
addresses events posing a significant risk of disrupting the Systems'
operations, including events that could cause a wide-scale or major
disruption in the provision of the Clearing Agency Activities;
(i) Incorporate the use of a secondary site in EB's business
continuity plan that is designed to ensure that the Systems can resume
operations within two hours following disruptive events; and
(j) Regularly test or otherwise validate EB's business continuity
plans; and identify, monitor, and manage the risks that key
participants, other financial market infrastructures, and service and
utility providers might pose to the Systems' operations in relation to
the Clearing Agency Activities.
(2) For purposes of condition C.1, such policies and procedures
shall be consistent with current information technology industry
standards, which shall be comprised of information technology practices
that are widely available to information technology professionals in
the financial sector and issued by a widely recognized organization. EB
shall inform the Commission of the information technology industry
standards that EB has chosen to use, affirm that choice on an annual
basis, and provide advance notice of the use of different standards as
soon as practicable.
(3) EB shall provide the Commission with an annual update on the
status of the items set forth in condition C.1.
(4) EB shall establish, implement, maintain, and enforce written
policies and procedures reasonably designed to ensure that the Systems
operate on an ongoing basis in a manner that complies with the
conditions applicable to the Systems and with EB's rules and governing
documents applicable to the Clearing Agency Activities.
(5)(a) Upon EB having a reasonable basis to conclude that a
disruption, compliance issue, or intrusion of the Systems that impacts,
or is reasonably likely to impact, the Clearing Agency Activities has
occurred (a ``Systems Event''), EB shall:
(i) Take appropriate corrective action, which shall include, at a
minimum, devoting adequate resources to remedy the Systems Event as
soon as reasonably practical;
(ii) Notify the Commission of such Systems Event within 24 hours
after occurrence;
(iii) Until such time as a Systems Event is resolved and EB's
investigation of the Systems Event is closed, provide updates
pertaining to such Systems Event to the Commission on a regular basis;
(iv) Within 48 hours after the occurrence of a Systems Event or
where EB reasonably determines that such deadline cannot be met and so
notifies the Commission, promptly thereafter, submit an interim written
notification pertaining to such Systems Event to the Commission
containing: (A) A detailed description of: The relevant discovery and
duration times, detection, root cause, and remedial actions taken or
planned regarding the Systems Event (to the extent known at report
time); EB's assessment of the entities (including types of market
participants) and EB services affected by the Systems Event; EB's
assessment of the impact of the Systems Event on the Participants; and
any other pertinent information known by the EB about the Systems
Event; and (B) a copy of any information disseminated to EB's U.S.
Participants in accordance with EB's notification practices regarding
the Systems Event;
(v) Within ten business days after the occurrence of a Systems
Event, or where EB reasonably determines that such deadline cannot be
met and so notifies the Commission, promptly thereafter, submit a
written final report regarding the matters covered in the interim
report required under (iv) above to the Commission; and
(vi) For Systems Events characterized as ``Bronze level'' events
(i.e., a Systems Event in which the incident is clearly understood,
almost immediately under control, involves only one business unit and/
or entity, and is resolved within a few hours), in lieu of the
reporting in (i) through (v) above, provide on a quarterly basis an
aggregated list of Bronze level events.
(b) As used herein: (i) A ``disruption'' means an event in the
Systems that

[[Page 94004]]

disrupts, or significantly degrades, the normal operation of the
Systems in relation to the Clearing Agency Activities; (ii) a
``compliance issue'' means an event at EB that has caused any System to
operate in a manner that does not comply with the applicable conditions
or EB's rules and governing documents applicable to the Clearing Agency
Activities; and (iii) an ``intrusion'' means any unauthorized entry
into the Systems in relation to the Clearing Agency Activities.
(6) EB shall, within 30 calendar days after the end of each
quarter, submit to the Commission a report describing completed,
ongoing, and planned material changes to the Systems that support or
are related to the Clearing Agency Activities during the prior,
current, and subsequent calendar quarters, including the dates or
expected dates of commencement and completion. EB shall establish
reasonable written criteria for identifying a change to the Systems as
material and report such changes in accordance with such criteria.
(7) EB shall provide the Commission with: (a) Annually, the audited
control report made available to EB's Participants prepared in
accordance with internationally accepted standards for assurance
reports on controls at a service organization (such as the
International Standard on Assurance Engagements (ISAE) Standard No.
3402); (b) annually, copies of those portions of any annual control
report provided by EB to its primary Belgian regulator that describes
controls applicable to the Systems as used to support or in relation to
the Clearing Agency Activities; and (c) copies of agendas, reports and
presentation materials relating to the capacity, integrity, resiliency,
availability, and security or compliance of the Systems that are
provided by EB or its primary Belgian regulator to any committee of
regulators that implements the memorandum of understanding among
regulators of Euroclear Group's CSD entities that provides for the
coordinated and common oversight and supervision of the Euroclear
Group.
(8) EB shall make, keep, and preserve at least one copy of all
documents relating to its compliance with the operational risk
conditions; keep all such documents for a period of not less than five
years, the first two years in an easily accessible place (which may be
located in the European Union); and upon request of the Commission,
promptly furnish to the possession of the Commission copies of any such
documents.

D. Additional Conditions Applicable to the Clearing Agency Activities

(1) EB shall provide to the Commission its annual audited financial
statements prepared by competent independent audit personnel.
(2) EB shall notify the Commission of any material changes to any
service agreement between EB and any other entity that is performing
Clearing Agency Activities on behalf of EB if such changes are
reasonably expected to materially affect the Clearing Agency
Activities.
(3) EB will notify the Commission (a) promptly following
termination of any U.S. Participant as a participant in the Euroclear
System, (b) promptly following the liquidation by EB of any securities
collateral pledged by a U.S. Participant to EB to secure an extension
of credit made through the Euroclear System, and (c) promptly following
EB becoming aware of the institution of any proceedings to have a U.S.
Participant declared insolvent or bankrupt, and will respond to
Commission requests for information about any U.S. Participant about
whom the Commission has financial solvency concerns, including, for
example, a settlement default by a U.S. Participant.
(4) EB shall annually provide to the Commission a report
describing: (a) Material changes to the representations made by EB in
support of the approval of this Order that would not otherwise require
amendment of EB's application for exemption on Form CA-1 in accordance
with these conditions; (b) the functioning of EB's policies and
procedures for monitoring its own compliance with the conditions of
this order regarding the Clearing Agency Activities (and the compliance
of any affiliated or third-party service provider referred to in
condition D.2); and (c) the management by EB of any conflicts of
interest of such affiliated or third-party service provider that EB
becomes aware have arisen since the prior report with respect to the
performance of the Clearing Agency Activities.
(5) EB shall keep records relating to the Clearing Agency
Activities regarding settlement details, account details, service
agreements, and service notices sent to U.S. Participants pertaining to
the operation of the Clearing Agency Activities, retain such records
for a period of not less than five years, the first two years in an
easily accessible place (which may be located in the European Union),
and upon request of any representative of the Commission promptly
furnish, or require its service providers to furnish, copies thereof to
the possession of such representative.\126\
---------------------------------------------------------------------------

\126\ The Commission has modified this condition to clarify
that, upon request of any representative of the Commission, EB shall
promptly furnish, or require its service providers to promptly
furnish, copies of the records described in the condition to the
possession of such representative.
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(6) EB shall respond to and require its service providers to
respond to a request from the Commission for additional information
relating to the Clearing Agency Activities and provide access to the
Commission to conduct on-site inspections of all facilities (including
automated systems and systems environment), records, and personnel
related to the Clearing Agency Activities. The request for information
shall be made and the inspections shall be conducted solely for the
purpose of reviewing the Clearing Agency Activities' operations and
compliance with the federal securities laws and the terms and
conditions in any order exempting EB from registration as a clearing
agency with regard to the Clearing Agency Activities.
(7) EB shall file with the Commission amendments to its application
for exemption on Form CA-1 if it makes any material change to the
Clearing Agency Activities or any change materially affecting the
Clearing Agency Activities as summarized in the relevant exemption
order, EB's amended Form CA-1 or in any subsequently filed amendments
to its Form CA-1 that would make such previously provided information
incomplete or inaccurate.

E. Modifications to Exemption

EB is required to file with the Commission amendments to its
application for exemption on Form CA-1 if it makes any material change
affecting the Clearing Agency Activities--as summarized in this order,
in its application on Form CA-1 dated May 9, 2016, or in any
subsequently filed amendments to its application on Form CA-1--that
would make such previously provided information incomplete or
inaccurate.
In addition, the Commission may modify by order the terms, scope,
or conditions of EB's exemption from registration as a clearing agency
if it determines that such modification is necessary or appropriate in
the public interest, the protection of investors, or otherwise in
furtherance of the purposes of the Exchange Act. Furthermore, the
Commission may limit, suspend, or revoke this exemption if it finds
that EB has violated or is unable to comply with any of the provisions
set forth in this order if such action is necessary or appropriate in
the public interest, for

[[Page 94005]]

the protection of investors, or otherwise in furtherance of the
purposes of the Exchange Act.

V. Conclusion

The Commission believes that the Modification Application
demonstrates that EB will have sufficient operational capabilities to
facilitate prompt and accurate collateral management services and to
support the establishment of linked and coordinated facilities for the
settlement of obligations under its collateral management services in
support of securities transactions. The Commission also notes that EB's
exemption will be subject to conditions that are designed to enable the
Commission to monitor EB's operational capacity and safeguards,
corporate structure, and ability to operate in a manner to further the
purposes of Section 17A of the Exchange Act. Further, the conditions
include a robust set of reporting requirements that will allow the
Commission to monitor the growth and development of EB's exempted
clearing agency activities so that the Commission will be well
positioned to evaluate whether and when any modifications to the terms
and conditions set forth above are necessary. Therefore, for the
reasons discussed throughout this order, the Commission finds that the
Modification Application is consistent with the public interest, the
protection of investors, and the purposes of Section 17A of the
Exchange Act.
It is hereby ordered, pursuant to Section 17A(b)(1) of the Exchange
Act, that the application for a modification of EB's exemption from
registration as a clearing agency under Section 17A(b)(1) of the
Exchange Act filed by EB on May 9, 2016 (File No. 601-01) be, and
hereby is, approved within the scope described in this order and
subject to the terms and conditions contained in this order.

By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-30853 Filed 12-21-16; 8:45 am]
BILLING CODE 8011-01-P

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