National Securities Clearing Corporation, 46329-46332 [2017-21282]
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Federal Register / Vol. 82, No. 191 / Wednesday, October 4, 2017 / Notices
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NYSEAMER–2017–19, and should be
submitted on or before October 25,
2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–21280 Filed 10–3–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
32839; File No. 812–14818]
National Securities Clearing
Corporation
September 28, 2017.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice. Notice of application for
an order under section 3(b)(2) of the
Investment Company Act of 1940
(‘‘Act’’).
sradovich on DSK3GMQ082PROD with NOTICES
AGENCY:
National Securities Clearing
Corporation (‘‘NSCC’’).
SUMMARY OF APPLICATION: Applicant
seeks an order under Section 3(b)(2) of
APPLICANT:
34 17
CFR 200.30–3(a)(12).
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the Act declaring it to be primarily
engaged in a business other than that of
investing, reinvesting, owning, holding
or trading in securities. Applicant is
primarily in the business of providing
clearing, settlement, risk management,
central counterparty (‘‘CCP’’) and
ancillary services to the registered
broker-dealers, banks and other market
participants that are its ‘‘Members’’, as
such term is defined in the rules and
procedures of Applicant (‘‘NSCC
Rules’’).
FILING DATE: The application was filed
on September 8, 2017.
HEARING OR NOTIFICATION OF HEARING: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
applicant with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on October 23, 2017, and
should be accompanied by proof of
service on applicant, in the form of an
affidavit or, for lawyers, a certificate of
service. Hearing requests should state
the nature of the writer’s interest, the
reason for the request, and the issues
contested. Persons who wish to be
notified of a hearing may request
notification by writing to the
Commission’s Secretary.
ADDRESSES: Secretary, Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–1090.
Applicant, c/o David F. Freeman, Jr.,
Arnold & Porter LLP, 601 Massachusetts
Avenue NW., Washington, DC 20001.
FOR FURTHER INFORMATION CONTACT:
Jennifer O. Palmer, Senior Counsel, at
(202) 551–5786, or Nadya B. Roytblat,
Assistant Chief Counsel, at (202) 551–
6825 (Division of Investment
Management, Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
number, or applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Applicant’s Representations
1. Formed in 1976, Applicant is
organized under the Business
Corporation Law of the State of New
York and is registered as a clearing
agency under the Securities and
Exchange Act of 1934, as amended
(‘‘Exchange Act’’), and the rules and
regulations thereunder (‘‘Exchange Act
Rules’’). Applicant is also designated as
a systemically important financial
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46329
market utility (‘‘SIFMU’’) by the
Financial Stability Oversight Council
(‘‘FSOC’’) under Title VIII of The DoddFrank Wall Street Reform and Consumer
Protection Act (‘‘Dodd-Frank Act’’). As
a registered clearing agency, Applicant
is regulated by the Commission. As a
SIFMU, Applicant is subject to
enhanced supervision by the
Commission in consultation with the
Board of Governors of the Federal
Reserve System (‘‘FRB’’).1
2. Applicant is a wholly-owned
subsidiary of The Depository Trust &
Clearing Corporation (‘‘DTCC’’).
Applicant has one authorized class of
stock, which is common stock. All
issued and outstanding shares of
Applicant’s common stock are held by
DTCC and there are no plans to alter
this wholly-owned subsidiary structure.
There is no trading market in
Applicant’s shares.
3. Applicant provides clearing,
settlement, risk management and CCP
services to its Members for broker-tobroker trades in the United States
involving equities, corporate and
municipal debt, American depositary
receipts, exchange traded funds and
unit investment trusts. In addition to
these core services, Applicant also offers
ancillary, non-guaranteed services,
including wealth management services
(‘‘WMS’’) and insurance and retirement
services (‘‘I&RS’’), which automate
manual processes in the mutual funds,
insurance and alternative investment
products areas. Applicant’s operations
are national.
4. Applicant operates a continuous
net settlement (‘‘CNS’’) system, through
which the trades in CNS-eligible
securities are processed. Applicant acts
as a CCP in respect of such CNS trades,
becoming the buyer to every seller and
the seller to every buyer, thereby
guaranteeing the completion of such
trades and eliminating counterparty risk
among its Members. As a result,
Applicant has obligations to and claims
against its Members on opposite sides of
guaranteed netted transactions.
Applicant also provides a trade
guarantee with respect to balance order
transactions.
5. Due to the nature of Applicant’s
operations and the large volume and
dollar value of trades that it guarantees,
Applicant maintains a large clearing
fund (‘‘Clearing Fund’’) and a large
amount of other cash on hand. The
Clearing Fund consists of deposits (i.e.,
margin and other contributions) posted
by Members in the form of cash and
1 See Securities Exchange Act Release No. 34–
78961 (Sep. 28, 2016), 81 FR 70786, 70788 (Oct. 13,
2016).
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sradovich on DSK3GMQ082PROD with NOTICES
eligible securities. Pursuant to the NSCC
Rules, Members are required to
maintain deposits in the Clearing Fund.
The amount of each Member’s required
deposit is calculated by Applicant using
a risk-based margin methodology.
6. Applicant uses the Clearing Fund,
among other resources, to manage its
risks related to its trade guarantee.
Specifically, deposits in the Clearing
Fund, among other resources, are
available to Applicant to facilitate
settlement in the event of a Member
default and to cover potential losses due
to such an event. Additionally,
Applicant uses its liquid assets to meet
the requirements imposed on it as a
registered clearing agency and SIFMU
and to generate revenue to the extent
such assets are not otherwise being put
to productive use.
7. To more efficiently utilize Clearing
Fund cash and other cash on hand,
Applicant seeks to prudently invest part
of the Clearing Fund cash and other
cash on hand in bank certificates of
deposit (‘‘CDs’’) and other investment
securities. The managed investment of
cash on hand also provides a measure
of protection against inflationary factors
and bolsters and protects NSCC’s
financial position over time.
8. Applicant is permitted under the
NSCC Rules to invest Clearing Fund
cash in accordance with an investment
policy approved by Applicant’s board of
directors (‘‘Board of Directors’’).
Applicant is also permitted to invest
other cash on hand in accordance with
such investment policy (‘‘Clearing
Agency Investment Policy’’).
9. The Clearing Agency Investment
Policy is designed to comply with the
laws, rules and regulations applicable to
Applicant as a registered clearing
agency and SIFMU, including, without
limitation, Exchange Act Section 17A
and Exchange Act Rule 17Ad–22.2 The
Clearing Agency Investment Policy was
approved by the Commission pursuant
to delegated authority.3 Any material
changes to the Clearing Agency
Investment Policy must be approved by
the Board of Directors. Any changes to
the Clearing Agency Investment Policy,
regardless of materiality, will be
submitted to the Commission pursuant
2 Exchange Act Rule 17 Ad–22 requires, among
other things, that Applicant hold assets in a way
that minimizes risk of loss or delay in access to
them and to invest assets in instruments with
minimal credit, market, and liquidity risks.
3 See Securities Exchange Act Release No. 34–
75730 (August 19, 2015), 80 FR 51638 (August 25,
2015) (SR–NSCC–2015–802) (Notice of Filing of
Amendment No. 1 and No Objection to Advance
Notice Filing, as Modified by Amendment No. 1, to
Establish a Prefunded Liquidity Program As Part of
NSCC’s Liquidity Risk Management).
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to Exchange Act Rule 19b–4, with
confidential treatment requested.
Applicant’s Legal Analysis
1. Section 3(a)(l)(A) of the Act defines
the term ‘‘investment company’’ to
include an issuer that is or holds itself
out as being engaged primarily, or
proposes to engage primarily, in the
business of investing, reinvesting or
trading in securities. Section 3(a)(l)(C) of
the Act further defines an investment
company as an issuer that is engaged or
proposes to engage in the business of
investing, reinvesting, owning, holding
or trading in securities, and owns or
proposes to acquire investment
securities having a value in excess of 40
percent of the value of the issuer’s total
assets (exclusive of Government
securities and cash items) on an
unconsolidated basis. Applicant states
that it does not hold itself out as being
engaged primarily in the business of
investing, reinvesting or trading in
securities within the meaning of Section
3(a)(l)(A) of the Act. Applicant states
that it does not currently hold, but has
previously held 4 and may again wish to
hold, more than 40 percent of its total
assets, exclusive of Government
securities and cash items, in bank CDs
and other investment securities. Upon
such change in composition of its assets,
Applicant might fall within the
definition of investment company under
Section 3(a)(l)(C) of the Act.
2. Rule 3a–1 under the Act provides
an exemption from the definition of
investment company if no more than 45
percent of a company’s total assets
consist of, and not more than 45 percent
of its net income over the last four
quarters is derived from, securities other
than Government securities and
securities of majority-owned
subsidiaries and companies primarily
controlled by it. Applicant states that it
cannot rely on Rule 3a–1 because it may
again wish to hold more than 45 percent
4 Applicant has previously held greater than 40%
of the value of its total assets, exclusive of
Government securities and cash items, in bank CDs
and other investment securities. Applicant has
relied on Rule 3a–3 under the Act, which provides
an exemption from the definition of investment
company for wholly-owned subsidiaries of a
company that is not itself an investment company.
However, that exemption does not apply if the
wholly-owned subsidiary has issued paper (other
than short-term paper) to other holders. On
September 10, 2015, Applicant launched a
commercial paper and extendible note program
(‘‘CP Program’’) under which Applicant could issue
paper other than short-term paper. Out of an
abundance of caution, (a) prior to the launch of the
CP Program, Applicant reduced its holdings of
investment securities to less than 40% of the value
of Applicant’s total assets, exclusive of Government
securities and cash items, and (b) pending the
application, Applicant has maintained its holdings
of investment securities below the 40% threshold.
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of its total assets in bank CDs and other
investment securities and, upon such
change in composition of its assets, it
will not meet the requirements of Rule
3a–1.
3. Section 3(b)(2) of the Act provides
that, notwithstanding Section 3(a)(l)(C)
of the Act, the Commission may issue
an order declaring an issuer to be
primarily engaged in a business other
than that of investing, reinvesting,
owning, holding, or trading in securities
directly, through majority-owned
subsidiaries, or controlled companies
conducting similar types of businesses.
Applicant requests an order under
Section 3(b)(2) of the Act declaring that
it is primarily engaged in a business
other than that of investing, reinvesting,
owning, holding or trading in securities,
and therefore is not an investment
company as defined in the Act. In
determining whether an issuer is
‘‘primarily engaged’’ in a noninvestment company business under
Section 3(b)(2) of the Act, the
Commission considers the following
factors: (a) The company’s historical
development, (b) its public
representations of policy, (c) the
activities of its officers and directors, (d)
the nature of its present assets, and (e)
the sources of its present income.5
4. Applicant submits that it satisfies
the criteria for issuance of an order
under Section 3(b)(2) of the Act because
the facts show that Applicant is
primarily engaged in the business of
providing clearing, settlement, risk
management, CCP and ancillary services
to its Members, and not in the business
of investing, reinvesting, owning,
holding or trading in securities.
a. Historical Development. Applicant
states that its origins date back to the
back-office crisis of the late 1960s and
early 1970s and the enactment of the
Securities Acts Amendments of 1975,
which enabled the development of a
national securities market system and a
national clearance and settlement
system and their regulation.6 Applicant
was formed in 1976 and now operates
as a wholly-owned subsidiary of DTCC.
Applicant states that it (a) is a clearing
agency registered under the Exchange
Act and, as such, is subject to
comprehensive regulation by the
Commission and (b) has been
designated by FSOC as a SIFMU under
Title VIII of the Dodd-Frank Act and, as
such, is subject to enhanced supervision
by the Commission in consultation with
the FRB. Applicant states that both the
5 Tonopah Mining Company of Nevada, 26 SEC
426, 427 (1947).
6 See Securities Acts Amendments of 1975, Public
Law 94–29, 89 Stat. 97 (1975).
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Commission and the FRB, among other
federal agencies, have previously
indicated that they believe FMUs such
as securities clearing agencies generally
engage in activities other than those of
an investment company.7
Applicant represents that
substantially all of its activities since its
formation have been devoted to
providing clearing, settlement, risk
management, CCP and ancillary services
to its Members, and Applicant intends
to continue to be primarily engaged in
providing such services.
Applicant further represents that all
of its issued and outstanding shares are
held by DTCC. Applicant states that its
shares have not been, and will not be,
held out as a financial investment for
profit to the public.
b. Public Representations of Policy.
Applicant states that it has never made
any public representations that would
indicate that it is in any business other
than providing clearing, settlement, risk
management, CCP and ancillary
services. Applicant represents that it has
never held itself out as an investment
company within the meaning of the Act.
Applicant provides that all annual
reports, web postings, press releases and
written communications issued by
Applicant have related to its business of
providing clearing, settlement, risk
management, CCP and ancillary
services. Applicant states that no press
release or advertising or promotional
piece has been issued by Applicant
concerning its holdings of investment
securities or its capital investment
policies, or concerning any potential for
profit or appreciation in value relating
to its own shares.
c. Activities of Officers and Directors.
Applicant represents that all of its
directors and officers devote
substantially all of their time spent on
Applicant’s matters to its business of
providing clearing, settlement, risk
management, CCP and ancillary
services. Applicant states that its
directors and officers receive no extra or
7 Specifically, Applicant asserts that in the notice
of final rulemaking issued by the Commission and
the FRB (among other federal agencies) to
implement the Volcker Rule, the agencies
supported their decision not to expressly exclude
FMUs from the definition of ‘‘covered funds’’ for
purposes of the Volcker Rule by (a) stating that
‘‘[they] believe that FMUs are not investment
vehicles of the type [the Volcker Rule] was designed
to address, but rather entities that generally engage
in other activities, including acting as central
counterparties that reduce counterparty risk in
clearing and settlement activities’’ and (b) noting
that ‘‘if the FMU is primarily engaged in
transferring, clearing, or settling payments,
securities, or other financial transactions among or
between financial institutions, the FMU could rely
on the exclusion to the definition of investment
company provided by section 3(b)(1)’’ of the Act.
See 79 FR 5536, 5700 (Jan. 31, 2014).
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separate compensation for any services
that may directly or indirectly involve
Applicant’s investment securities.
Applicant states that the composition of
its Board of Directors is designed to
comply with the fair representation
requirement for clearing agencies set
forth in Exchange Act Section 17A and
the governance standards for registered
clearing agencies set forth in Exchange
Act Rule 17Ad–22.
d. Nature of Assets. Applicant states
that, as a service organization and a
wholly-owned subsidiary of DTCC,
Applicant owns very few fixed assets
and the vast majority of its assets consist
of cash and securities. Applicant states
that, as of March 31, 2017, it had about
$7.85 billion in total assets, of which
cash and cash equivalents accounted for
about $2.89 billion (36.84%), Members’
segregated cash accounted for about
$29.59 million (0.38%), receivables
accounted for about $32.82 million
(0.42%), other current assets accounted
for about $5.19 million (0.07%) and
Clearing Fund accounted for about
$4.84 billion (61.65%). Applicant states
that, as of March 31, 2017, it owned
Government securities valued at
$201.60 million (2.57% of total assets)
but did not own investment securities
(as defined in Section 3(a)(2) of the Act).
Applicant states that it has previously
held greater than 40% of the value of its
total assets, exclusive of Government
securities and cash items, in bank CDs
and other investment securities (as
defined in Section 3(a)(2) of the Act),
and Applicant may wish to do so again.
Applicant believes that the fact that it
has held, and may again wish to hold,
investment securities in excess of the
40% threshold should not preclude a
finding that it is engaged primarily in a
business other than that of investing,
reinvesting, owning, holding or trading
in securities, provided that it uses its
investment securities for bona fide
purposes relating to its clearing,
settlement, risk management, CCP and
ancillary services, and that it does not
invest or trade in securities for
speculative purposes.
Applicant states that it provides CCP
services and certain trade guarantees to
its Members and requires Members that
utilize such services to make required
deposits to the Clearing Fund.
Applicant notes that it is a clearing
agency registered under the Exchange
Act and, as such, is subject to
comprehensive regulation by the
Commission. Applicant further notes
that it is a SIFMU designated by FSOC
under Title VIII of the Dodd-Frank Act
and, as such, is subject to enhanced
supervision by the Commission in
consultation with the FRB. Applicant
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46331
represents that its allocation,
management and use of investment
securities is consistent with its business
of providing CCP and trade guaranty
services to its Members. Applicant
represents that all of its investments are
and will be managed in accordance with
the Clearing Agency Investment Policy.
Applicant states that it bears the entire
counterparty risk for the obligations of
Members to each other with respect to
all trades guaranteed by Applicant.
Applicant explains that it manages this
risk by, among other things, requiring
Members to maintain deposits in the
Clearing Fund; however, that does not
transfer the risk from Applicant.
Accordingly, Applicant submits that its
primary business for purposes of
Section 3(b)(2) of the Act may be
determined without regard to the nature
of its assets.
e. Sources of Income. Applicant
represents that it has always received
the vast majority of its revenues from
the provision of clearing, settlement,
risk management, CCP and ancillary
services to its Members and not from
interest on investment securities.
Applicant states that, for the quarter
ended March 31, 2017, it derived about
$70.56 million of its total revenues from
the provision of clearing services, about
$27.21 million from ancillary services
(WMS and I&RS), and $0.79 million
from settlement and asset services.
Applicant states that it realized interest
income of about $5.87 million for the
quarter ended March 31, 2017.
Applicant further provides that, for the
year ended December 31, 2016, it had
total revenues of $378,943,000 and
interest income of $11,325,000.
Applicant states that it currently invests
its cash in Government securities and
bank deposits. Applicant notes that total
revenues as presented in the application
and the Applicant’s financial statements
reflect revenues from operations and do
not include interest income (Applicant’s
financial statements account for interest
income as a separate line item).
Applicant further states that it does not
break out its expenses using a cost
allocation method such that a net
income after taxes figure is available for
each category of services or interest
income. Accordingly, Applicant submits
that its revenues, not net income,
should be used as the basis for
evaluating its investment company
status.
Applicant projects that its interest
income will increase over the next three
years, reaching an estimated
$55,700,000 in 2019. Applicant
represents that the projected increase in
interest income will mostly be driven by
growth in Applicant’s CP Program and
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rising interest rates. Applicant states
that this projection also reflects
anticipated increases in its holdings of
investment securities should the
Commission grant the requested Order;
however, Applicant does not anticipate
that its interest income from investment
securities would ever represent other
than a small amount as compared to its
total revenues. Applicant further states
that its projected increase in interest
income will not result in any material
increase in net income for Applicant
because (a) it passes through to its
Members substantially all of its earnings
on Clearing Fund cash and (b) its
earnings on CP Program proceeds are
substantially offset by its interest
expense on the commercial paper notes
and extendible notes that are issued to
holders.
5. Applicant asserts that its historical
development, its public representations
of policy, the activities of its officers
and directors and its sources of revenue,
as discussed in the application,
demonstrate that it is engaged primarily
in the business of providing clearing,
settlement, risk management, CCP and
ancillary services to its Members, and
not in an investment business.
Applicant thus asserts that it satisfies
the criteria for issuing an order under
Section 3(b)(2) of the Act.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–21282 Filed 10–3–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81745; File Nos. SR–DTC–
2017–014; SR–NSCC–2017–013; SR–FICC–
2017–017]
Self-Regulatory Organizations; The
Depository Trust Company; National
Securities Clearing Corporation; Fixed
Income Clearing Corporation; Order
Approving Proposed Rule Changes To
Adopt the Clearing Agency Operational
Risk Management Framework
sradovich on DSK3GMQ082PROD with NOTICES
September 28, 2017.
I. Introduction
On July 25, 2017, The Depository
Trust Company (‘‘DTC’’), Fixed Income
Clearing Corporation (‘‘FICC’’), and
National Securities Clearing Corporation
(‘‘NSCC,’’ each a ‘‘Clearing Agency,’’
and collectively with DTC and FICC, the
‘‘Clearing Agencies’’), filed with the
Securities and Exchange Commission
(‘‘Commission’’) proposed rule changes
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SR–DTC–2017–014, SR–NSCC–2017–
013, and SR–FICC–2017–017,
respectively, pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder.2 The proposed rule changes
were published for comment in the
Federal Register on August 14, 2017.3
The Commission did not receive any
comment letters on the proposed rule
changes. For the reasons discussed
below, the Commission approves the
proposed rule changes.
II. Description of the Proposed Rule
Changes
The proposed rule changes would
adopt the Clearing Agency Operational
Risk Management Framework
(‘‘Framework’’) of the Clearing
Agencies, as described below.
A. Overview of the Framework
The Framework would describe how
each of Clearing Agency manages
operational risk. Operational risk is
defined by the Clearing Agencies in the
Framework as the risk of direct or
indirect loss or reputational harm
resulting from an event, internal or
external, that is the result of inadequate
or failed processes, people, and systems
(‘‘Operational Risk’’).4 More
specifically, the Framework would
describe how the Clearing Agencies (i)
manage Operational Risk; (ii) manage
their information technology risks; and
(iii) manage their business continuity
risks.5 The DTCC Operational Risk
Management group (‘‘ORM’’) would
maintain the Framework, on behalf of
the Clearing Agencies.6
B. Operational Risk Management
The Framework would describe how
ORM is charged with establishing
appropriate systems, policies,
procedures, and controls to enable the
Clearing Agencies to identify plausible
sources of Operational Risk.7
Specifically, the Framework would
describe how the Clearing Agencies
identify key risks, including Operational
Risk, and set metrics to categorize such
risks (e.g., from ‘‘no impact’’ to ‘‘severe
impact’’) through ‘‘Risk Tolerance
Statements.’’ 8 The Framework would
describe how the Risk Tolerance
Statements identify the overall risk
reduction or mitigation objectives of the
Clearing Agencies, with respect to
identified risks to the Clearing
Agencies.9 The Framework would also
explain how the Risk Tolerance
Statements document the risk controls
and other measures the Clearing
Agencies would use to manage such
identified risks (including escalation
requirements in the event of risk metric
breaches). The Framework would state
that ORM would annually review,
revise, update, and/or create, as
necessary, each Risk Tolerance
Statement.10
The Framework would also describe
how the Clearing Agencies monitor key
risks, including Operational Risk,
through ‘‘Risk Profiles.’’ 11 The
Framework would state that ‘‘Risk
Profiles’’ identify how risk is assessed
for each of the Clearing Agencies’
businesses and support areas (each a
‘‘Clearing Agency Business’’ and/or
‘‘Clearing Agency Support Area’’).12 The
Framework would explain that the risk
assessment documented in these
profiles includes (1) assessment of
inherent risk (i.e., risk without any
mitigating controls); (2) evaluation of
existing controls and, as appropriate,
any new additional controls, as well as
the evaluation of the same risk against
the strength of such controls; and (3)
identification of any residual risk and a
determination to either further mitigate
such risk or accept such risk by the
applicable Clearing Agency Business or
Clearing Agency Support Area.13
The Framework would then describe
generally the responsibilities of ORM,
which is part of the second line of
defense within the Clearing Agencies’
‘‘Three Lines of Defense’’ approach to
risk management.14 The Framework
would identify ORM responsibilities
8 Id.
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 81338
(August 8, 2017), 82 FR 36049 (August 14, 2017)
(SR–DTC–2017–014, SR–NSCC–2017–013, SR–
FICC–2017–017) (‘‘Notice’’).
4 Notice, 82 FR at 37943.
5 Id.
6 Id. The parent company of the Clearing
Agencies is The Depository Trust & Clearing
Corporation (‘‘DTCC’’). DTCC operates on a shared
services model with respect to the Clearing
Agencies. Most corporate functions are established
and managed on an enterprise-wide basis pursuant
to intercompany agreements under which it is
generally DTCC that provides a relevant service to
a Clearing Agency.
7 Notice, 82 FR at 37943.
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
9 Id.
10 Id.
11 Id.
12 Id.
13 Id.
14 Id. The Three Lines of Defense approach to risk
management identifies the roles and responsibilities
of different Clearing Agency Businesses or Clearing
Agency Support Areas in identifying, assessing,
measuring, monitoring, mitigating, and reporting
certain key risks faced by the Clearing Agencies.
The Three Lines of Defense approach is more fully
described in a separate framework, the Clearing
Agency Risk Management Framework. See
Securities Exchange Act Release No. 81635
(September 15, 2017), 82 FR 44224 (September 21,
2017)(SR–DTC–2017–013, SR–NSCC–2017–012,
SR–FICC–2017–016).
E:\FR\FM\04OCN1.SGM
04OCN1
]]>Agencies
[Federal Register Volume 82, Number 191 (Wednesday, October 4, 2017)]
[Notices]
[Pages 46329-46332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21282]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 32839; File No. 812-14818]
National Securities Clearing Corporation
September 28, 2017.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice. Notice of application for an order under section
3(b)(2) of the Investment Company Act of 1940 (``Act'').
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Applicant: National Securities Clearing Corporation (``NSCC'').
Summary of Application: Applicant seeks an order under Section 3(b)(2)
of the Act declaring it to be primarily engaged in a business other
than that of investing, reinvesting, owning, holding or trading in
securities. Applicant is primarily in the business of providing
clearing, settlement, risk management, central counterparty (``CCP'')
and ancillary services to the registered broker-dealers, banks and
other market participants that are its ``Members'', as such term is
defined in the rules and procedures of Applicant (``NSCC Rules'').
Filing Date: The application was filed on September 8, 2017.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicant with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on October 23, 2017, and should be accompanied by proof of
service on applicant, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-1090. Applicant, c/o David F. Freeman, Jr.,
Arnold & Porter LLP, 601 Massachusetts Avenue NW., Washington, DC
20001.
FOR FURTHER INFORMATION CONTACT: Jennifer O. Palmer, Senior Counsel, at
(202) 551-5786, or Nadya B. Roytblat, Assistant Chief Counsel, at (202)
551-6825 (Division of Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or applicant
using the Company name box, at https://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicant's Representations
1. Formed in 1976, Applicant is organized under the Business
Corporation Law of the State of New York and is registered as a
clearing agency under the Securities and Exchange Act of 1934, as
amended (``Exchange Act''), and the rules and regulations thereunder
(``Exchange Act Rules''). Applicant is also designated as a
systemically important financial market utility (``SIFMU'') by the
Financial Stability Oversight Council (``FSOC'') under Title VIII of
The Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-
Frank Act''). As a registered clearing agency, Applicant is regulated
by the Commission. As a SIFMU, Applicant is subject to enhanced
supervision by the Commission in consultation with the Board of
Governors of the Federal Reserve System (``FRB'').\1\
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\1\ See Securities Exchange Act Release No. 34-78961 (Sep. 28,
2016), 81 FR 70786, 70788 (Oct. 13, 2016).
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2. Applicant is a wholly-owned subsidiary of The Depository Trust &
Clearing Corporation (``DTCC''). Applicant has one authorized class of
stock, which is common stock. All issued and outstanding shares of
Applicant's common stock are held by DTCC and there are no plans to
alter this wholly-owned subsidiary structure. There is no trading
market in Applicant's shares.
3. Applicant provides clearing, settlement, risk management and CCP
services to its Members for broker-to-broker trades in the United
States involving equities, corporate and municipal debt, American
depositary receipts, exchange traded funds and unit investment trusts.
In addition to these core services, Applicant also offers ancillary,
non-guaranteed services, including wealth management services (``WMS'')
and insurance and retirement services (``I&RS''), which automate manual
processes in the mutual funds, insurance and alternative investment
products areas. Applicant's operations are national.
4. Applicant operates a continuous net settlement (``CNS'') system,
through which the trades in CNS-eligible securities are processed.
Applicant acts as a CCP in respect of such CNS trades, becoming the
buyer to every seller and the seller to every buyer, thereby
guaranteeing the completion of such trades and eliminating counterparty
risk among its Members. As a result, Applicant has obligations to and
claims against its Members on opposite sides of guaranteed netted
transactions. Applicant also provides a trade guarantee with respect to
balance order transactions.
5. Due to the nature of Applicant's operations and the large volume
and dollar value of trades that it guarantees, Applicant maintains a
large clearing fund (``Clearing Fund'') and a large amount of other
cash on hand. The Clearing Fund consists of deposits (i.e., margin and
other contributions) posted by Members in the form of cash and
[[Page 46330]]
eligible securities. Pursuant to the NSCC Rules, Members are required
to maintain deposits in the Clearing Fund. The amount of each Member's
required deposit is calculated by Applicant using a risk-based margin
methodology.
6. Applicant uses the Clearing Fund, among other resources, to
manage its risks related to its trade guarantee. Specifically, deposits
in the Clearing Fund, among other resources, are available to Applicant
to facilitate settlement in the event of a Member default and to cover
potential losses due to such an event. Additionally, Applicant uses its
liquid assets to meet the requirements imposed on it as a registered
clearing agency and SIFMU and to generate revenue to the extent such
assets are not otherwise being put to productive use.
7. To more efficiently utilize Clearing Fund cash and other cash on
hand, Applicant seeks to prudently invest part of the Clearing Fund
cash and other cash on hand in bank certificates of deposit (``CDs'')
and other investment securities. The managed investment of cash on hand
also provides a measure of protection against inflationary factors and
bolsters and protects NSCC's financial position over time.
8. Applicant is permitted under the NSCC Rules to invest Clearing
Fund cash in accordance with an investment policy approved by
Applicant's board of directors (``Board of Directors''). Applicant is
also permitted to invest other cash on hand in accordance with such
investment policy (``Clearing Agency Investment Policy'').
9. The Clearing Agency Investment Policy is designed to comply with
the laws, rules and regulations applicable to Applicant as a registered
clearing agency and SIFMU, including, without limitation, Exchange Act
Section 17A and Exchange Act Rule 17Ad-22.\2\ The Clearing Agency
Investment Policy was approved by the Commission pursuant to delegated
authority.\3\ Any material changes to the Clearing Agency Investment
Policy must be approved by the Board of Directors. Any changes to the
Clearing Agency Investment Policy, regardless of materiality, will be
submitted to the Commission pursuant to Exchange Act Rule 19b-4, with
confidential treatment requested.
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\2\ Exchange Act Rule 17 Ad-22 requires, among other things,
that Applicant hold assets in a way that minimizes risk of loss or
delay in access to them and to invest assets in instruments with
minimal credit, market, and liquidity risks.
\3\ See Securities Exchange Act Release No. 34-75730 (August 19,
2015), 80 FR 51638 (August 25, 2015) (SR-NSCC-2015-802) (Notice of
Filing of Amendment No. 1 and No Objection to Advance Notice Filing,
as Modified by Amendment No. 1, to Establish a Prefunded Liquidity
Program As Part of NSCC's Liquidity Risk Management).
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Applicant's Legal Analysis
1. Section 3(a)(l)(A) of the Act defines the term ``investment
company'' to include an issuer that is or holds itself out as being
engaged primarily, or proposes to engage primarily, in the business of
investing, reinvesting or trading in securities. Section 3(a)(l)(C) of
the Act further defines an investment company as an issuer that is
engaged or proposes to engage in the business of investing,
reinvesting, owning, holding or trading in securities, and owns or
proposes to acquire investment securities having a value in excess of
40 percent of the value of the issuer's total assets (exclusive of
Government securities and cash items) on an unconsolidated basis.
Applicant states that it does not hold itself out as being engaged
primarily in the business of investing, reinvesting or trading in
securities within the meaning of Section 3(a)(l)(A) of the Act.
Applicant states that it does not currently hold, but has previously
held \4\ and may again wish to hold, more than 40 percent of its total
assets, exclusive of Government securities and cash items, in bank CDs
and other investment securities. Upon such change in composition of its
assets, Applicant might fall within the definition of investment
company under Section 3(a)(l)(C) of the Act.
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\4\ Applicant has previously held greater than 40% of the value
of its total assets, exclusive of Government securities and cash
items, in bank CDs and other investment securities. Applicant has
relied on Rule 3a-3 under the Act, which provides an exemption from
the definition of investment company for wholly-owned subsidiaries
of a company that is not itself an investment company. However, that
exemption does not apply if the wholly-owned subsidiary has issued
paper (other than short-term paper) to other holders. On September
10, 2015, Applicant launched a commercial paper and extendible note
program (``CP Program'') under which Applicant could issue paper
other than short-term paper. Out of an abundance of caution, (a)
prior to the launch of the CP Program, Applicant reduced its
holdings of investment securities to less than 40% of the value of
Applicant's total assets, exclusive of Government securities and
cash items, and (b) pending the application, Applicant has
maintained its holdings of investment securities below the 40%
threshold.
---------------------------------------------------------------------------
2. Rule 3a-1 under the Act provides an exemption from the
definition of investment company if no more than 45 percent of a
company's total assets consist of, and not more than 45 percent of its
net income over the last four quarters is derived from, securities
other than Government securities and securities of majority-owned
subsidiaries and companies primarily controlled by it. Applicant states
that it cannot rely on Rule 3a-1 because it may again wish to hold more
than 45 percent of its total assets in bank CDs and other investment
securities and, upon such change in composition of its assets, it will
not meet the requirements of Rule 3a-1.
3. Section 3(b)(2) of the Act provides that, notwithstanding
Section 3(a)(l)(C) of the Act, the Commission may issue an order
declaring an issuer to be primarily engaged in a business other than
that of investing, reinvesting, owning, holding, or trading in
securities directly, through majority-owned subsidiaries, or controlled
companies conducting similar types of businesses. Applicant requests an
order under Section 3(b)(2) of the Act declaring that it is primarily
engaged in a business other than that of investing, reinvesting,
owning, holding or trading in securities, and therefore is not an
investment company as defined in the Act. In determining whether an
issuer is ``primarily engaged'' in a non-investment company business
under Section 3(b)(2) of the Act, the Commission considers the
following factors: (a) The company's historical development, (b) its
public representations of policy, (c) the activities of its officers
and directors, (d) the nature of its present assets, and (e) the
sources of its present income.\5\
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\5\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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4. Applicant submits that it satisfies the criteria for issuance of
an order under Section 3(b)(2) of the Act because the facts show that
Applicant is primarily engaged in the business of providing clearing,
settlement, risk management, CCP and ancillary services to its Members,
and not in the business of investing, reinvesting, owning, holding or
trading in securities.
a. Historical Development. Applicant states that its origins date
back to the back-office crisis of the late 1960s and early 1970s and
the enactment of the Securities Acts Amendments of 1975, which enabled
the development of a national securities market system and a national
clearance and settlement system and their regulation.\6\ Applicant was
formed in 1976 and now operates as a wholly-owned subsidiary of DTCC.
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\6\ See Securities Acts Amendments of 1975, Public Law 94-29, 89
Stat. 97 (1975).
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Applicant states that it (a) is a clearing agency registered under
the Exchange Act and, as such, is subject to comprehensive regulation
by the Commission and (b) has been designated by FSOC as a SIFMU under
Title VIII of the Dodd-Frank Act and, as such, is subject to enhanced
supervision by the Commission in consultation with the FRB. Applicant
states that both the
[[Page 46331]]
Commission and the FRB, among other federal agencies, have previously
indicated that they believe FMUs such as securities clearing agencies
generally engage in activities other than those of an investment
company.\7\
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\7\ Specifically, Applicant asserts that in the notice of final
rulemaking issued by the Commission and the FRB (among other federal
agencies) to implement the Volcker Rule, the agencies supported
their decision not to expressly exclude FMUs from the definition of
``covered funds'' for purposes of the Volcker Rule by (a) stating
that ``[they] believe that FMUs are not investment vehicles of the
type [the Volcker Rule] was designed to address, but rather entities
that generally engage in other activities, including acting as
central counterparties that reduce counterparty risk in clearing and
settlement activities'' and (b) noting that ``if the FMU is
primarily engaged in transferring, clearing, or settling payments,
securities, or other financial transactions among or between
financial institutions, the FMU could rely on the exclusion to the
definition of investment company provided by section 3(b)(1)'' of
the Act. See 79 FR 5536, 5700 (Jan. 31, 2014).
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Applicant represents that substantially all of its activities since
its formation have been devoted to providing clearing, settlement, risk
management, CCP and ancillary services to its Members, and Applicant
intends to continue to be primarily engaged in providing such services.
Applicant further represents that all of its issued and outstanding
shares are held by DTCC. Applicant states that its shares have not
been, and will not be, held out as a financial investment for profit to
the public.
b. Public Representations of Policy. Applicant states that it has
never made any public representations that would indicate that it is in
any business other than providing clearing, settlement, risk
management, CCP and ancillary services. Applicant represents that it
has never held itself out as an investment company within the meaning
of the Act. Applicant provides that all annual reports, web postings,
press releases and written communications issued by Applicant have
related to its business of providing clearing, settlement, risk
management, CCP and ancillary services. Applicant states that no press
release or advertising or promotional piece has been issued by
Applicant concerning its holdings of investment securities or its
capital investment policies, or concerning any potential for profit or
appreciation in value relating to its own shares.
c. Activities of Officers and Directors. Applicant represents that
all of its directors and officers devote substantially all of their
time spent on Applicant's matters to its business of providing
clearing, settlement, risk management, CCP and ancillary services.
Applicant states that its directors and officers receive no extra or
separate compensation for any services that may directly or indirectly
involve Applicant's investment securities. Applicant states that the
composition of its Board of Directors is designed to comply with the
fair representation requirement for clearing agencies set forth in
Exchange Act Section 17A and the governance standards for registered
clearing agencies set forth in Exchange Act Rule 17Ad-22.
d. Nature of Assets. Applicant states that, as a service
organization and a wholly-owned subsidiary of DTCC, Applicant owns very
few fixed assets and the vast majority of its assets consist of cash
and securities. Applicant states that, as of March 31, 2017, it had
about $7.85 billion in total assets, of which cash and cash equivalents
accounted for about $2.89 billion (36.84%), Members' segregated cash
accounted for about $29.59 million (0.38%), receivables accounted for
about $32.82 million (0.42%), other current assets accounted for about
$5.19 million (0.07%) and Clearing Fund accounted for about $4.84
billion (61.65%). Applicant states that, as of March 31, 2017, it owned
Government securities valued at $201.60 million (2.57% of total assets)
but did not own investment securities (as defined in Section 3(a)(2) of
the Act).
Applicant states that it has previously held greater than 40% of
the value of its total assets, exclusive of Government securities and
cash items, in bank CDs and other investment securities (as defined in
Section 3(a)(2) of the Act), and Applicant may wish to do so again.
Applicant believes that the fact that it has held, and may again wish
to hold, investment securities in excess of the 40% threshold should
not preclude a finding that it is engaged primarily in a business other
than that of investing, reinvesting, owning, holding or trading in
securities, provided that it uses its investment securities for bona
fide purposes relating to its clearing, settlement, risk management,
CCP and ancillary services, and that it does not invest or trade in
securities for speculative purposes.
Applicant states that it provides CCP services and certain trade
guarantees to its Members and requires Members that utilize such
services to make required deposits to the Clearing Fund. Applicant
notes that it is a clearing agency registered under the Exchange Act
and, as such, is subject to comprehensive regulation by the Commission.
Applicant further notes that it is a SIFMU designated by FSOC under
Title VIII of the Dodd-Frank Act and, as such, is subject to enhanced
supervision by the Commission in consultation with the FRB. Applicant
represents that its allocation, management and use of investment
securities is consistent with its business of providing CCP and trade
guaranty services to its Members. Applicant represents that all of its
investments are and will be managed in accordance with the Clearing
Agency Investment Policy. Applicant states that it bears the entire
counterparty risk for the obligations of Members to each other with
respect to all trades guaranteed by Applicant. Applicant explains that
it manages this risk by, among other things, requiring Members to
maintain deposits in the Clearing Fund; however, that does not transfer
the risk from Applicant. Accordingly, Applicant submits that its
primary business for purposes of Section 3(b)(2) of the Act may be
determined without regard to the nature of its assets.
e. Sources of Income. Applicant represents that it has always
received the vast majority of its revenues from the provision of
clearing, settlement, risk management, CCP and ancillary services to
its Members and not from interest on investment securities. Applicant
states that, for the quarter ended March 31, 2017, it derived about
$70.56 million of its total revenues from the provision of clearing
services, about $27.21 million from ancillary services (WMS and I&RS),
and $0.79 million from settlement and asset services. Applicant states
that it realized interest income of about $5.87 million for the quarter
ended March 31, 2017. Applicant further provides that, for the year
ended December 31, 2016, it had total revenues of $378,943,000 and
interest income of $11,325,000. Applicant states that it currently
invests its cash in Government securities and bank deposits. Applicant
notes that total revenues as presented in the application and the
Applicant's financial statements reflect revenues from operations and
do not include interest income (Applicant's financial statements
account for interest income as a separate line item). Applicant further
states that it does not break out its expenses using a cost allocation
method such that a net income after taxes figure is available for each
category of services or interest income. Accordingly, Applicant submits
that its revenues, not net income, should be used as the basis for
evaluating its investment company status.
Applicant projects that its interest income will increase over the
next three years, reaching an estimated $55,700,000 in 2019. Applicant
represents that the projected increase in interest income will mostly
be driven by growth in Applicant's CP Program and
[[Page 46332]]
rising interest rates. Applicant states that this projection also
reflects anticipated increases in its holdings of investment securities
should the Commission grant the requested Order; however, Applicant
does not anticipate that its interest income from investment securities
would ever represent other than a small amount as compared to its total
revenues. Applicant further states that its projected increase in
interest income will not result in any material increase in net income
for Applicant because (a) it passes through to its Members
substantially all of its earnings on Clearing Fund cash and (b) its
earnings on CP Program proceeds are substantially offset by its
interest expense on the commercial paper notes and extendible notes
that are issued to holders.
5. Applicant asserts that its historical development, its public
representations of policy, the activities of its officers and directors
and its sources of revenue, as discussed in the application,
demonstrate that it is engaged primarily in the business of providing
clearing, settlement, risk management, CCP and ancillary services to
its Members, and not in an investment business. Applicant thus asserts
that it satisfies the criteria for issuing an order under Section
3(b)(2) of the Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21282 Filed 10-3-17; 8:45 am]
BILLING CODE 8011-01-P
